<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                         D.G. JEWELLERY OF CANADA, LTD.

                                    FORM 20-F


                                   (MARK ONE)

       [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                                       OR

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

     [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM _____ TO _____

                             COMMISSION FILE NUMBER
                                     I-14600

                          D.G. JEWELLERY OF CANADA LTD.
             (Exact Name of Registrant as specified in its charter)

                                     Canada
                 (Jurisdiction of incorporation or organization)

                               1001 Petrolia Road
                         Toronto, Ontario, Canada M3J2X7
                    (Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

NONE
<PAGE>

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Title of Class                                     Name of Exchange
--------------                                     ----------------
Common Stock, no par value                         NASDAQ National Market System
Redeemable Common Stock Purchase Warrants

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:

Common Stock, no par value
Redeemable Common Stock Purchase Warrants

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:

5,168,000 shares of Common Stock
1,265,000 Redeemable Common Stock Purchase Warrants

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

[X] Yes [ ] No

Indicate by check mark which financial statement item the registrant has elected
to follow:

[X] Item 17 [ ] Item 18


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                               EXCHANGE RATE DATA

         The Company maintains its books of account in Canadian dollars, but has
provided the financial data in this 20-F in United States dollars with its audit
conducted in accordance with generally accepted auditing standards in the United
States of America. All references to dollar amounts in this 20-F are in United
States dollars.

         The following table sets forth, for the periods indicated, certain
exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of United States
dollars per one Canadian dollar and are the inverse of rates quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average
exchange rate is based on the average of the exchange rates on the last day of
each month during such periods. On May 31, 1999, the exchange rate was US$1.00
per Cdn$1.48.

<TABLE>
<CAPTION>
         YEAR ENDED DECEMBER 31,     1994     1995      1996      1997      1998
         -----------------------     ----     ----      ----      ----      ----
<S>                              <C>       <C>       <C>       <C>       <C>
RATE AT END OF PERIOD            $  0.7143 $  0.7353 $  0.7299 $  0.6991 $  0.6532
AVERAGE RATE DURING PERIOD            0.72      0.72      0.73      0.72    0.6745
HIGH                                  0.70      0.70      0.72      0.69    0.7061
LOW                                   0.76      0.75      0.75      0.74    0.6376
</TABLE>


                                       3
<PAGE>

                                     PART 1

ITEM 1 - DESCRIPTION OF BUSINESS GENERAL

D.G. Jewellery of Canada, Ltd. (the "Company") is primarily engaged in the
design, manufacture, merchandising and distribution of stone-set jewelry for
department stores, mass merchants, catalogue showrooms, television shopping
networks and other high volume retailers and major discounters. The Company is
also taking advantage of non-traditional wholesale distribution outlets such as
Internet wholesale advertising services, liquidation operations, and consumer
product rental companies.

The Company believes it has established itself as a low-cost, high-volume and
quality manufacturer in the value priced jewelry market. Its primary competitive
advantage, particularly for the DG Division, is its innovative manufacturing
methods (the "D.G. Manufacturing Process") which allow for substantially reduced
costs per unit, provide substantial capacity and better quality, and require
minimal skilled labor. The Company's merchandising strategy also involves the
design of products that it believes will continually appeal to the mass market.
The Company also assists its customers in creatively merchandising its jewelry
to encourage impulse purchases.

The Company's operations are divided into three divisions. The "DG Division"
manufactures and distributes value priced stone-set rings and other jewelry
products. The Company has operated the DG Division in Canada for 30 years. The
"Aviv" division manufactures and assembles bridal jewelry. The Company acquired
Aviv in February 1998, effective June 1, 1997. The "Diamonair" division
assembles and distributes jewelry, primarily set with synthetic stones. The
Company acquired Diamonair in November 1997.

Growth has been achieved by providing its customers with quality and service and
in recent years through the D.G. Manufacturing Process, which enables the
Company to provide its customers with value priced stone-set mass appeal jewelry
at lower cost than many of its competitors. The Company maintains long-standing
relationships with Canadian customers such as Reed's Jewellers, the Twain Group,
Zellers, Inc. and The Shopping Channel. In the last three years, the Company has
also focused on the much larger American market. The DG Division established a
United States sales office in Tampa, Florida and currently sells products to
customers such as Wal-Mart, Fred Meyer Inc., Value Vision International Inc.,
Suarez Corporation, which is a direct mail order company, and others, including
Zales Corporation ("Zales"), the largest jewelry retailer in the United States.
The Company has also utilized strategic acquisitions to increase its presence in
the United States. Diamonair's customers include Finlay Fine Jewelry Corp
("Finlay"), which operates leased fine jewelry departments in department stores
for retailers such as May Department Stores and Federated Department Stores.
Aviv sells to Zales and Finlay, as well as many independent jewelers in the
United States. In 1998, approximately 81% of the Company's sales were in the
United States, as compared to 17% and 63% in 1995 and 1997, respectively.

BUSINESS STRATEGY

The Company believes that its business strategy is enabling it to become a
leader in the value priced, stone- set jewelry market. The Company believes that
its business strategy allows it to leverage the expertise and customer base it
has established in the Canadian market to increase sales in the much larger
markets of the


                                       4
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United States. The Company also believes that it can increase sales of its other
products, including bridal jewelry, by integrating the Company's divisions. The
Company's primary business strategies are as follows:

CAPITALIZE ON THE DG MANUFACTURING PROCESSES

The DG Manufacturing Process allows the Company to produce mass quantities of
stone-set, value priced jewelry. The Company is able to offer quality products
to its customers at prices that are competitive with or lower than its
competitors offering similar goods while maintaining adequate profit margins.
Management believes that the DG Manufacturing Process produces goods that are
superior to comparably priced goods produced by competitors. The Company
believes that these advantages will allow for continued growth in market share
of value priced jewelry.

INTEGRATE THE AVIV AND DIAMONAIR ACQUISITIONS

The Company completed both the Aviv and Diamonair acquisitions in the last
fiscal year. Although the DG Division manufactures products for Diamonair, the
three divisions' operations have not been fully integrated. The Company
continues to review the Aviv and Diamonair product lines to determine how to
continue to manufacture more of their product lines with the DG manufacturing
process. The Company has begun utilizing each division's distributions lines and
customers to promote and "cross-sell" the products of the other divisions. The
Company believes that it will continue this cross-promotion to increase the rate
of penetration of DG's products into the US markets.

EXTEND CUSTOMER BASE AND UTILIZE NON-TRADITIONAL DISTRIBUTION LINES SUCH AS THE
INTERNET

While the Company has developed a broad customer base, the Company targets its
marketing efforts towards large retailers, such as department stores, mass
merchandisers, television shopping networks, catalogue showrooms and other
discount stores, whose overall share of retail jewelry sales is expected to
increase. These customers typically require a high level of service, and the
Company seeks to build long-term relationships by making it convenient and
cost-effective for these customers to rely on the Company for essential services
such as product design, inventory control and delivery.

The Company also sells its products through non-traditional wholesale
distribution outlets such as internet wholesale advertising services,
liquidation operations and consumer product rental companies. The Company has
recently entered into agreements to sell its products on or through Bid.com,
U-Bid, Amazon.com, Lycos, Go2Net, Egghead and Shop at Home. These agreements
have been assigned to Xite Jewelry.Com, Inc., which is owned 50% by the Company
and 50% by the children of Jack Berkovits. Management believes that the
Company's products are ideal for many of these non-traditional outlets, which
usually feature moderate and lower priced products.

MAINTAIN A BROAD PRODUCT MIX

The Company maintains a broad product mix so that it can meet the varying needs
of its customers, who range from discount stores such as Wal-Mart, Inc. to
department stores such as Sak's Fifth Avenue. This also enables the Company to
supply each customer with a number of different styles of each product, which
jewelry retailers generally like to have in stock. The DG Division, Aviv and
Diamonair currently offer the Company's customers approximately 5,000, 4,000 and
600 styles of rings, respectively. The Company also offers its customers over
800 other products, primarily pendants and earrings.

The Company attempts to provide its customers with rings and other jewelry
products that incorporate traditional styles and designs. While the Company
regularly updates its product lines and offers new


                                       5
<PAGE>

products, it seeks to avoid designs incorporating fashion trends that are
expected to have short life cycles. This approach enables the Company and its
customers to avoid accumulating obsolete inventory. Additionally, the Company
can create specially designed products in response to requests or pictures
submitted by customers. This variety and flexibility allows the Company to meet
a wide variety of its customers' jewelry needs.

ACQUISITIONS AND JOINT VENTURES

The Company has utilized the Aviv and Diamonair acquisitions to increase the
rate of the Company's penetration into the U.S. jewelry markets. Each
acquisition also broadened the Company's product line and increased the number
of customers that the Company works with, creating cross-selling opportunities.
Although it has no current plans or potential targets, the Company may make
additional acquisitions of manufacturers or distributors of complementary
jewelry products in the future if such potential targets offer strategic
opportunities for the Company as a whole.

The Company also intends to use strategic partnerships and joint ventures to
create additional revenue for the Company and to create opportunities for the
sale of the Company's products.

MARKETING

The Company maintains sales offices at its Toronto headquarters, at the Aviv
manufacturing and office facility in Houston, Texas, at the Diamonair offices in
Cedar Knolls, New Jersey and in Tampa, Florida. The Company's sales staff
promotes the Company's products to a wide range of customers via existing
relationships, trade shows and product presentations.

The Company seeks to provide value priced, quality products. Price and quality
are of particular importance in the jewelry market because, except at the
highest end of the market, advertising and brand name recognition are minimal.
The Company believes that the D.G. Manufacturing Process allows it to provide
its customers the DG Division products at prices that are competitive with or
lower than its competitors' products. Similarly, the incorporation of DG
Division products and manufacturing into Diamonair has allowed for competitive
pricing of that division's products. The Aviv products, which usually are made
of more expensive metals and contain more expensive stones, are also
competitively priced when compared with goods of similar quality. Marketing of
Aviv products are aided by Aviv's specialization in bridal jewelry, which allows
Aviv's sales people to focus their marketing efforts on certain market segments.

Often, retail stores are provided pre-arranged presentation trays. These trays
usually contain the Company's most popular styles in common sizes. The Company
believes that these trays make it convenient and cost effective for retail
stores to display and promote the Company's products. The Company believes that
retail store operators who utilize these pre-arranged presentation displays,
which may include point-of-purchase displays, will elicit impulse purchases of
the Company's products because the styles are familiar to customers and are
priced at attractive levels. Aviv also utilizes independent sales
representatives, who promote Aviv's products to smaller retail outlets.

Management emphasizes maintaining and building upon the Company's relationships
with existing customers. The Company provides specialized support services to
its customers, including bar-coding and drop shipping to individual customer
locations as well as central distribution centers. Further, in order to


                                       6
<PAGE>

fill customer orders more quickly and effectively the Company has an Electronic
Data Interchange ("EDI") program pursuant to which the Company electronically
receives purchase orders from participating customers and electronically
transmits to the customers order acknowledgments, invoices and advance shipping
notices. The EDI link and other support options, in management's opinion,
assures an ongoing business relationship. The Company believes these specialized
services, which are particularly important in marketing to large retailers,
enhance the Company's ability to attract and retain customers.

Although the Company's sales are generally non-refundable, the Company may
accept returns of certain items in order to maintain customer goodwill and as
part of promotional programs. Returns of products are not significant and
generally are made as part of stock balancing transactions in which the returned
products are replaced with products better suited to the customer's needs. The
Company has not experienced any difficulty in reselling returned merchandise.

In 1997, the Company began listing excess inventory on an Internet wholesale
commerce website. The Company intends to continue this practice because it
provides an inexpensive method for disposing of excess inventory on favorable
terms.

CUSTOMERS

The Company maintains a broad base of customers concentrated in four major
jewelry segments: (i) department stores such as Sears Roebuck, J.C. Penney and
Saks Fifth Avenue (the Company's products are also sold in certain Federated
Department Stores and May Department Stores through Finlay Fine Jewelry Corp.,
an operator of jewelry boutiques within other department stores); (ii) specialty
markets, such as The Shopping Channel (Canada), ValueVision, and Xite
Jewelry.Com, Inc.; (iii) jewelry chain stores such as Zales, Gordons, Freidmans
and others and (iv) mass merchandisers such as Zellers, Inc. and Wal-Mart. The
Company generally does not sell pursuant to any formal or long-term contracts,
although it does have a long term supply agreement with Zellers, Inc.

For the year ended December 31, 1998, three major customers accounted for
approximately 36% of sales. For the year ended December 31, 1998 (AFiscal
1998"), Value Vision accounted for approximately 21% of sales. Other than
ValueVision, no customer accounted for more than 10% of sales in Fiscal 1998.
For the year ended on December 31, 1997, Finlay accounted for 19% of sales,
Silverman Jeweller's Consultants, Inc. accounted for 14% of sales and Wal-Mart
accounted for 9% sales. The loss of any of these customers or a significant
reduction in their orders would have an adverse effect on the Company. The
Company believes that its relationship with its customers is good.

PRODUCT AND DESIGN

The Company seeks to provide its customers with a broad selection of jewelry
products that incorporate traditional styles and designs. The Company seeks to
avoid designs incorporating fashion trends which are expected to have short life
cycles. This approach enables the Company and its customers to avoid
accumulating obsolete inventory. Additionally, producing a greater quantity of a
particular product results in a more efficient manufacturing process.

However, the Company regularly updates its product lines and offers new
products. The Company maintains a staff of model makers/designers who develop
new designs based on research of the market and surveying stores, catalogues and
industry publications to determine current trends. Additionally, the


                                       7
<PAGE>

Company can create specially designed products in response to requests or
pictures submitted by customers. New product design prototypes are created, and
after evaluation the final product design is produced.

A principal goal of the Company's design program is to maximize the perceived
value of the Company's products through design and manufacturing innovations
that enhance the appearance of the jewelry without causing corresponding
increases in product costs. This design approach assists the Company in
producing quality products reflecting general consumer tastes. The Company,
particularly the D.G. Division and Diamonair, seeks products, not as fashion
leaders or faddish styles, but of enduring styles that encourage moderately
priced impulse purchases.

Rings account for approximately 90% of the Company's sales by units sold and
dollar revenue. The D.G. Division currently offers approximately 5,000 styles of
rings. The rings are moderately priced and the average wholesale price of the
rings is approximately $150.00. The retail price of the D.G. Division's better
selling products range from $30.00 to $600.00, although some products can cost
as much as $1,000. The rings are made principally in 10 karat gold. The
Company's products contain a variety of stones classified as diamonds, precious
(e.g., rubies, sapphires, emeralds), semi-precious (e.g., garnet, topaz,
amethyst, aquamarine, opal) or synthetics (e.g., cubic zirconia, spinel). The
use of stones increases average unit sales price and results in greater margins.
Additionally, the inclusion of stones creates a greater margin flexibility to
insulate the Company from fluctuation in the value of gold. The D.G. Division
manufactures a number of rings with multiple stones because management believes
the D.G. Manufacturing Process allows the Company to produce multiple stone
items at a lower cost than the Company's competition.

Aviv offers approximately 4,000 rings, most of which are intended to be used as
wedding or engagement rings. Aviv's rings are made up of precious metals,
including 22 karat gold and platinum. The average wholesale price of the Aviv
products is $700.00. The retail price of Aviv's better selling products range
from between $500.00 and $1,500.00. Some of Aviv's diamond rings are sold for
more than $5,000.

Diamonair offers approximately 600 rings, primarily adorned with cubic zirconia
stones. Although many of Diamonair's products are made of precious metals, the
Diamonair products are generally lower priced goods. The average wholesale price
of Diamonair's products is $100. The retail price of Diamonair's better selling
products range from $50 to $500. The Company is planning to introduce other
stones, which may include gem stones as well as other synthetic stones into the
Diamonair products.

The Company, through each of its three divisions, offers approximately 800
earrings and pendants. Many of these products are manufactured with the D.G.
Manufacturing Process, which allows the Company to produce these items at costs
which are competitive with or less than the Company's competitors. The Company
also designs earrings and pendants to match some of the Company's rings so that
the products can be sold as a set.

MANUFACTURING PROCESS

The D.G. Manufacturing Process is a special process for producing a high-volume
of low-cost multi-stone rings. The D.G. Manufacturing Process provides the
Company, with a current estimated manufacturing capacity of approximately 20,000
rings per week. This process is utilized at the Toronto facility for the DG
Division product line and certain Diamonair products. The Company believes that
it has a reputation for its expertise in the setting of stones and the Toronto
facility is presently producing an average of


                                       8
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approximately 3,000 rings per week, but sometimes producing as much as 20,000
rings in a week. Management believes that its manufacturing capabilities
distinguish it from most of its competitors and enable it to produce very
competitively priced, quality and consistent products satisfying its customers'
demands for mass merchandising.

The D.G. Manufacturing Process combines modern technology, mechanization and
hand craftsmanship to produce fashionable and moderately priced jewelry. Its
manufacturing operations involve combining pure gold with other metals to
produce 10 and 14 karat gold, manufacturing cast jewelry, and finishing
operations such as cleaning, polishing, diamond-cutting, engraving, plating and
other jewelry work. The Company utilizes the lost-wax/cast-in-place method of
jewelry manufacturing to produce high-quality gold rings, earrings, pendants and
bracelets. This is based on an investment casting process used in the jewelry
manufacturing industry. It entails creating wax duplicates of the items which
are encased in a plaster mold. The plaster is hardened in an oven while the heat
melts away the wax, leaving a hollow mold pre-set with stones in place. The mold
is injected with metal, in effect reverse-mounting the stones in the jewelry.
After the casting process, the jewelry undergoes a series of cleaning and
polishing stages before being labeled with the retailer's price tag and bar
codes and shipped. This process allows unskilled labor with virtually no
training to set as many as 8,000 stones per day per stone setter. This compares
to the normal setting process of a skilled setter, setting up to 150 stones per
day, at a cost of up to $1.00 per stone or more. However, the percentage savings
are far more significant when the intrinsic values which make up the jewelry
item are lower. This is so because the greater the labor factor in the product's
cost structure, the greater the percentage savings when such labor factor is
reduced.

Many of the D.G. Division's manufacturing personnel are paid on a piece-work
basis. Management believes this basis provides incentive to maximize
productivity while at the same time, it provides the Company accuracy in cost
accounting. The Company's strict quality control guidelines ensure that quality
is not sacrificed for productivity. The Company uses a bar-coded tracking system
for all inventory in process. When a job bag is transferred from one employee to
another, it is automatically electronically 'wanded' (UPC bar coded for number
of units, style, and other pertinent customer information) into that employee's
custody. This has the effect of assigning responsibility for the inventory. It
also causes the recipient employee to verify quality of the product prior to his
commencement of work, in effect, policing the prior person's work. If the
previous employee's work was substandard, the recipient would return the job to
production control who would require the previous employee to correct the work
with no compensation. Otherwise, the recipient would have to correct such
product at no additional compensation and would further make the recipient's
work more difficult as well as delaying his production. Therefore, the system is
self policing.

Management believes that these significant savings will allow the Company to
produce jewelry that previously did not warrant large labor costs and
accordingly have not been produced by anyone else. Specifically, multi-stone
sterling silver products could now be produced en masse to retail at prices
geared to mass merchandiser's "customers" profiles. These products could now
sell in a range from $9.99 to $49.97 retail, and project a quality and perceived
value of several times that amount. Management believes the jewelry industry has
avoided producing this type of product since the sterling silver metal value and
the synthetic stone values did not warrant too much labor costs. The Company's
lower labor costs makes it possible to produce these products profitably.

Currently, manufacturing and other operations for the Aviv product line are
accomplished at the Company's facility in Texas. The lease to this factory was
assigned to the Company in connection with


                                       9
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the acquisition of Aviv. This five year old facility produces an average weekly
volume of 800 rings and Management believes its current facilities have the
capacity to produce approximately 4,500 rings per week

Diamonair primarily purchases products from the D.G. Division and other
manufacturers in a finished condition. However, Diamonair does do some assembly,
repair and packaging of its products from its facility in Cedar Knolls, New
Jersey.

The manufacturing process in the jewelry industry results in great volumes of
gold scrap. The Company has strict controls to minimize waste. Management
believes that its manufacturing processes reduce the handling of the end jewelry
product and accordingly, the quantity of jewelry scrap is greatly reduced. The
scrap in the form of chips, filings, grindings and sweepings, are recovered by
the Company and sent to refiners to recover the gold. The Company's recovery
from refiners in 1997 and 1998 were 1,565 ounces or approximately $545,000,
4,774 ounces, and $1,406,029 respectively.

SUPPLY

The Company purchases its gold from banks, gold refiners and commodity dealers.
Management believes this arrangement is sufficient to meet the Company's
requirements. Gold acquired for manufacture is at least .995 fine and is
combined with other metals to produce 10,14,18, or 22 karat gold. The term
'karat' refers to the gold content of alloyed gold, measured from a maximum of
24 karats (100% fine gold). Varying quantities of metals such as silver, copper,
nickel and zinc are combined with fine gold to produce 10, 14, 18 or 22 karat
gold of different colors. These alloys are in abundant supply and are readily
available to the Company. Other precious and semi-precious stones are available
from many suppliers in Canada and the United States.

The world's supply of diamonds comes primarily from De Beers Consolidated Mines,
Limited ('De Beers'), a South African company. The continued availability of
diamonds to the jewelry industry is dependent, to some degree, on a continual
supply from De Beers. While several other countries are major suppliers of
diamonds, in the event of an interruption of supply from South Africa, the
Jewelry industry, as a whole, could be adversely affected, which could impact
the supply of diamonds to the Company.

The Company does not presently engage in hedging activities with respect to
possible fluctuations in the prices of precious, semi-precious gemstones or
metals. The Company believes the risk of price fluctuations can be mitigated by
changes in the prices the Company charges its customers, which the Company has
historically done in response to such fluctuations. However, there can be no
assurance that a downward trend in the prices of stones or metals would not have
a material adverse impact on the valuation of the Company's inventories or that
an increase in prices would not make it more difficult or costly for the Company
to acquire inventory.

The Company purchases its supplies and raw materials from a variety of suppliers
and it does not believe the loss of any of the suppliers would have a material
effect on its business. Alternative sources of supply for raw materials for
production of jewelry are readily available.

The Company carefully inspects all materials sent and received from outside
suppliers, monitors the location and status of all inventory, and has strict
internal control procedures of all jewelry as it proceeds through the
manufacturing process. A complete audited physical inventory of gold, silver and
gemstones is taken at the Company's manufacturing and administrative facilities
on an annual basis, in addition to


                                       10
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other physical inventories during the year. The Company employs an agency to
provide a security staff and has various security procedures in the hiring of
personnel as well as internal-security procedures regulating employee conduct.

INSURANCE

The Company maintains primary all-risk insurance, with limits in excess of the
Company's current inventory levels, to cover thefts and damage to inventory
located on the Company's premises. The Company also maintains insurance covering
thefts and damage to Company owned inventory located off-site. The amount of
coverage available under such policies is limited and may vary by location, but
generally is in excess of the value of the gold supplied by the Company. The
Company maintains fidelity insurance which provides coverage against theft or
embezzlement by employees of the Company. Additionally, the Company maintains
director's and officer's liability insurance in the amount of cdn$10,000,000.

COMPETITION

The jewelry manufacturing industry is highly competitive, and the Company's
competitors include domestic and foreign jewelry manufacturers and wholesalers
and importers who may operate on a national, regional and local scale. The
primary competitive factors are price, design, quality, customer service and
established customer relationships.

The diverse distribution channels in which the Company markets its products
frequently involve different competitive factors. The ability to provide
specialized services is a particularly important competitive factor in its sales
to certain large retailers such as mass merchandisers, discount stores and
warehouse clubs. Product availability and the ability to offer consistent
product quality at competitive prices tend to be the key competitive factors to
the customer segments which the Company serves. Some of the Company's
competitors may specialize in sales to particular distribution channels and may
have relationships with customers in those distribution channels that make
competition by the Company more difficult. The Company believes that the recent
trend towards consolidation at the retail level in the jewelry industry will
increase the level of competition in the markets in which the Company competes.

In Canada, management believes it has two primary competitors, both larger than
the Company. A&A Jewelry of Scarborough, Ontario is Canada's largest jewelry
manufacturer. It manufactures both casted ring products and stamped gold
earrings and pendants, and its sales are both in Canada and the United States.
Finecraft Industries Limited is the other major Canadian manufacturer, which
also imports from the Far East.

In the United States, the market, although highly fragmented, does contain a
number of major competitors many of whom import much of their product from the
Far East and many of whom sell higher priced items. The United States
competitors include M. Fabrikant & Sons, Inc., Samuel Aaron Inc., Simon Golub,
PAJ, Inc., Nissko Jewellery Trading, World Pacific Products, Andel, Andin
International Inc., Oroamerica, Inc., Dalow Industries and Michael Anthony
Jewelers Inc.

PATENTS AND TRADEMARKS

The Company has received or applied for trademarks of certain product names and
for patents on


                                       11
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approximately 250 Aviv product designs. These trademarks and patents are not
economically material to the Company.

The Company does not have, nor does it rely, on patents to establish or protect
its market position. The Company has not applied for patent protection of the
D.G. Manufacturing Processes to avoid disclosing its unique application,
modification and improvements relating to certain basic processes known in the
industry. Further, the Company cannot be assured that the process which it
believes is proprietary would qualify for a patent, and if a patent would be
granted, there is no assurance as to the extent of its enforceability. There can
be no assurance that competitors will not be able to imitate the Company's
manufacturing processes, which could have a material adverse effect on the
Company.

THE NEW YORK GOLD AND DIAMOND EXCHANGE.

As part of the acquisition of Aviv, the Company acquired the New York Gold and
Diamond Exchange ("NY Gold"), a retail store. NY Gold is located in a 1,500
square foot area of the Aviv facility in Houston, Texas. NY Gold sells the
products of Aviv and other manufacturers and offers the Company an excellent
opportunity to profitably dispose of excess inventory of Aviv products. The
Company intends to increase the amount of DG Division and Diamonair products
that it sells in the store.

EMPLOYEES

At March 31, 1999, the Company employed 212 persons on a full-time basis,
including approximately 174 engaged in manufacturing and distribution, 14
salespeople, 17 general and administrative and 7 executives, each of whom
performs various other functions such as sales and marketing.

The Company has no unions and believes its relationship with its employees is
good.

ENVIRONMENTAL COMPLIANCE

Certain of the manufacturing processes utilized by the Company require the use
of chemicals and other hazardous materials. The Company has an ongoing
compliance program to ensure that its manufacturing processes are in compliance
with environmental rules and regulations.

SEASONALITY

Retail sales of jewelry are generally weighted to the fourth quarter. For most
manufacturers these sales patterns reflect a business that tends to fall
one-third in the first half of the year with the remaining two-thirds in the
second half of the year. The Company's sales in the first half of 1998 represent
approximately 40% of total revenues.

While the Company's sales are subject to seasonal fluctuations, this fluctuation
is mitigated to a degree by the early placement of orders by many of the
Company's customers, particularly for the Christmas holiday season. Further,
management believes that its sales and those of its customers are not as
seasonally affected as most competitor's sales because many of the Company's
products are lower priced goods designed for mass merchandising, which generate
year round impulse purchases. In addition, the Company does not expect to be as
effected because of its anticipated revenues from alternative customers such as
television shopping networks and sales over the internet.


                                       12
<PAGE>

ITEM 2 - DESCRIPTION OF PROPERTY

The Company's executive and administrative offices and primary manufacturing and
marketing facilities are located in a recently renovated 23,000 square foot
facility in Toronto, Ontario. This facility is leased from 1001 Petrolia Road
Limited Partnership, the general partner being 1013418 Ontario Inc. Jack
Berkovits, Chairman, CEO and President of the Company is the sole shareholder,
officer and director of that general partner. The lease is a 10 year net, net
lease and expires January 31, 2005. Annual lease payments are $107,948,
increasing each year by the greater of $.37 a square foot or the percentage
increase in the Consumer Price Index for the Municipality of Metropolitan
Toronto. Real estate taxes, utilities, maintenance and insurance cost the
Company approximately $95,000 for the 12 months ended December 31, 1998.
Management is of the opinion that the terms of the lease are as favorable as
could be obtained from unaffiliated third parties. See "Item 13. Interest of
Management in Certain Transactions."

The limited partnership owned by Mr. Berkovits originally obtained a $660,000
five year mortgage on the property from the Canadian Imperial Bank of Commerce
in 1993. At March 31, 1999, the mortgage was $515,661. The loan bears interest
at 7.8% and was renewed in October 1998 for an additional five years. The
Company is a guarantor of this mortgage. A second mortgage was obtained to
secure the Company's financing facilities with The Bank of Nova Scotia.

Effective as of June 1, 1997, the Company entered into a sublease for the 25,000
square foot manufacturing and office facility in Houston, Texas from which Aviv,
Inc. had operated prior to the Company's acquisition of Aviv. The sublease is to
terminate on the earliest of (i) May 30, 2003, (ii) four months after notice is
given by the Company, or (iii) upon termination of the primary lease on the
property. The primary lease is not due to terminate until March 2014, although
it is terminable by the landlord upon certain events, such as the failure of the
tenant to pay rent. The Company pays annual rent of $130,476. The Company
primarily uses the Houston facility for the manufacturing and storage of the
Aviv products, as well as sales, design and administrative offices. Also located
at the Houston facility is the Company's retail store, which occupies
approximately 1,500 square feet.

Effective as of November 21, 1997, the Company entered into a sublease for the
7,880 square foot facility in Cedar Knolls, New Jersey that Litton Systems had
used to operate Diamonair prior to its acquisition by the Company. The Company
has the option, upon thirty days notice, to reduce the total area which it
occupies and receive a proportionate reduction in rent so long as the Company
occupies at least 5,000 square feet. The sublease terminates on November 20,
1999. The Company pays annual rent of $84,789. The Company uses the facility for
the assembly and storage of Diamonair products, as well as sales, design and
administrative offices.

The Company believes that its facilities are adequate for the Company's current
operating levels and presently foreseeable growth

ITEM 3 - LEGAL PROCEEDINGS

On May 29, 1997, Zellers, a department store chain, initiated an action against
the Company in the Ontario Court of Justice (General Division) alleging a breach
of contract for failure by the Company to credit certain returns to Zellers'
account and to provide Zellers with replacement merchandise. Zellers had been


                                       13
<PAGE>

purchasing rings from the Company pursuant to a contract which was to terminate
in December 2001. Zellers sought compensatory damages of $1,800,000, punitive
damages of $360,000 and counsel fees and court costs. The parties have settled
the matter. The Company entered into a long term supply agreement for six years
from January 1999.

On August 13, 1997, L. Luria & Son, Inc., a customer of DG Jewellery of Canada,
Ltd., commenced a Chapter 11 bankruptcy action in the United States Bankruptcy
Court in the Southern District of Florida. The Trustee in Bankruptcy is seeking
to recover preferential transfers of approximately $133,857. The Trustee
alleges, among other claims, that certain payments were fraudulent conveyance.
The Company believes the allegations are without merit and intends to vigorously
defend its position. The outcome of the litigation can not be presently
determined.

The Company is not a party to any other material litigation nor are any such
proceedings pending or threatened.

ITEM 4 - CONTROL OF REGISTRANT

The Company is not directly or indirectly owned or controlled by another
corporation or by any foreign government.

PRINCIPAL SHAREHOLDERS

         The following table sets forth as of May 15, 1999, the names and
beneficial ownership of the Company's Common Stock beneficially owned, directly
or indirectly, by (i) each person who is a director or executive officer of the
Company, (ii) all directors and executive officers of the Company as a group,
and (iii) all holders of 5% or more of the outstanding shares of Common Stock of
the Company.

<TABLE>
<CAPTION>
                                                AMOUNT AND NATURE OF
                                                     BENEFICIAL
    NAMES AND ADDRESS OF BENEFICIAL OWNER(1)         OWNERSHIP(2)      PERCENTAGE OF SHARES OUTSTANDING
    ----------------------------------------         ------------      --------------------------------
<S>                                                  <C>                            <C>
Jack Berkovits...............................        2,688,375(3)                   49.3%

The Berkovits Family Trust...................             426,000                    8.0%

Sheba Berkovits(4)...........................          816,000(4)                   15.4%

Gary Davis...................................           29,000(6)                      *

Leonard Fasullo..............................           20,000(5)                      *

Theodore L. Bonsignore......................                2,500                      *

Myer Feiler..................................           50,000(7)                      *

Ronald Rutman................................                   0                      *


                                       14
<PAGE>

All directors and executive officers                    2,789,875                  51.9%
as a group (6) persons.......................
</TABLE>

* Less than one %.

      (1)   Except as set forth above, the address of each individual is 1001
            Petrolia Road, Toronto, Ontario, Canada M3J 2X7.

      (2)   Based upon information furnished to the Company by either the
            directors and executive officers or obtained from the stock transfer
            books of the Company. The Company is informed that these persons
            hold the sole voting and dispositive power with respect to the
            Common Stock except as noted herein. For purposes of computing
            'beneficial ownership' and the percentage of outstanding Common
            Stock held by each person or group of persons named above as of May
            15, 1999, any security which such person or group of persons has the
            right to acquire within 60 days after such date is deemed to be
            outstanding for the purpose of computing beneficial ownership and
            the percentage ownership of such person or persons, but is not
            deemed to be outstanding for the purpose of computing the percentage
            ownership of any other person. As of May 15, 1999, the Company had
            5,299,750 shares of Common Stock outstanding, an additional 83,875
            shares of Common Stock provided for issuance under the 1996 Plan,
            and an additional 411,375 shares of Common Stock provided for
            issuance under the 1998 Plan.

      (3)   Includes (i) 426,000 shares of Common Stock owned by the Berkovits
            Family Trust of which Mr. Berkovits and his wife are co-trustees;
            (ii) 390,000 shares of Common Stock owned by his wife and (iii)
            148,375 shares issuable upon options that are currently exercisable
            or exercisable in the next sixty days. Does not include an aggregate
            of 390,000 shares of Common Stock owned by two of Mr. Berkovits'
            sons who are independent of their father; and (ii)133,000 shares of
            Common Stock underlying the Options which are not currently
            exercisable or exercisable in the next sixty days.

      (4)   Includes 426,000 shares of Common Stock owned by the Berkovits
            Family Trust of which Ms. Berkovits is a co-trustee. Ms. Berkovits
            is the wife of Jack Berkovits.

      (5)   Includes 5,000 shares issuable upon the exercise of options which
            exercisable in the next sixty days.

      (6)   Includes 5,000 shares issuable upon the exercise of options which
            are exercisable in the next sixty days.

      (7)   Includes 30,000 shares issuable upon the exercise of options which
            are exercisable in the next sixty days.

ITEM 5 - NATURE OF TRADING MARKET

Since the initial public offering of the Company's Common Stock on April 17,
1997, the Common Stock and Warrants have been traded on the NASDAQ SmallCap
Market ("NASDAQ") under the symbols DGJL and DGJW, respectively, and on the
Boston Stock Exchange under the symbols DGJ and DGJW. On May 27, 1999, the
Company's Common Stock began trading on the NASDAQ National Market System. Prior
to April 1997, there was no market for the Company's shares. There is no
non-United States trading market for such securities and there is no limitation
on non-Canadians owning shares of the Company's Common Stock.


                                       15
<PAGE>

The following are the high and low sales prices reported for the Company's
shares as reported on NASDAQ during each quarter since such trading commenced in
April 17, 1997:

<TABLE>
<CAPTION>
                    Quarter                           High             Low
                    -------                           ----             ---
<S>                                                  <C>              <C>
           April 18, 1997-June 30, 1997              10 1/8           4 3/4
            Third Quarter 1997                        5               1 3/4
            Fourth Quarter 1997                       2 11/16         1 3/4

           First Quarter 1998                         3 5/8           1 3/4

           Second Quarter 1998                        4 5/8           3 1/8

           Third Quarter 1998                         5 1/2           1 7/8

           Fourth Quarter 1998                        9 7/6           4 1/2

           First Quarter 1999                         9 7/6           4 1/2

           Second Quarter April 1, - May 31, 1999     8 1/2           5 7/8
</TABLE>

As of April 30, 1999, there were 16 shareholders of record and approximately 800
beneficial owners.

ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS

There are no governmental laws, decrees or regulations in Canada relating to
restrictions on the export or import of capital, or affecting the remittance of
interest, dividends or other payments to non-resident holders of the Company's
common stock. See Item 7 "Taxation".

Except as provided in the Investment Canada Act, there are no limitations
specific to the rights of non-Canadians to hold or vote the common stock of the
Company under the laws of Canada or the Province of Ontario or in the charter
documents of the Company.

The Investment Canada Act requires a non-Canadian making an investment which
would result in the acquisition of control of a Canadian business, the gross
value of the assets of which exceed certain threshold levels or the business
activity of which is related to Canada's cultural heritage or national identity,
to either notify, or file an application for review with, Investment Canada, the
federal agency created by the Investment Canada Act.

The notification procedure involves a brief statement of information about the
investment on a prescribed form which is required to be filed with Investment
Canada by the investor at any time up to 30 days following implementation of the
investment. It is intended that investments requiring only notification will
proceed without government intervention unless the investment is in a specific
type of business activity related to Canada's cultural heritage and national
identity.


                                       16
<PAGE>

If an investment is reviewable under the Act, an application for review in the
form prescribed is normally required to be filed with Investment Canada prior to
the investment taking place and the investment may not be implemented until the
review has been completed and the Minister responsible for Investment Canada is
satisfied that the investments is likely to be of net benefit to Canada. If the
Minister is not satisfied that the investment is likely to be of net benefit to
Canada, the non-Canadian must not implement the investment or, if the investment
has been implemented, must divest himself of control of the business that is the
subject of the investment.

ITEM 7. TAXATION

Management considers that the following general summary fairly describes the
principal Canadian federal income tax consequences applicable to a holder of
common stock of the Company who is a resident of the United States and who is
not a resident of Canada and who does not use or hold, and is not deemed to use
or hold, his common stock in connection with carrying on a business in Canada (a
"non-resident shareholder").

This summary is based upon the current provisions of the Income Tax Act (Canada)
(the ITA), the regulations thereunder (the "Regulations") and the current
publicly announced administrative and assessing policies of Revenue Canada,
Taxation. This description is not exhaustive of all possible Canadian federal
income tax consequences and, does not take into account or anticipate any
changes in law, whether by legislative, governmental or judicial action, nor
does it take into account provincial or foreign tax considerations which may
differ significantly from those discussed herein.

DIVIDENDS

Dividends paid on Common Stock of the Company to a non-resident holder will be
subject to withholding tax. The Canada-US Income Tax Convention (1980) as
amended by the protocol signed on March 17, 1995 (the "Treaty"), provides that
the normal, 25% withholding tax rate is reduced to 5% on dividends paid on
shares of a corporation resident in Canada (such as the Company) to residents of
the United States, and also provides for a further reduction of the 25% rate to
5% where the beneficial owner of the dividends is a corporation which is a
resident of the United States which owns at least 10% of the voting shares of
the corporation paying the dividend. However, the Company does not anticipate
paying dividends in the near future. See Item 5, "Nature of Trading Market."

CAPITAL GAINS

A non-resident of Canada is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of a share of a public corporation
unless the share represents "taxable Canadian property" to the holder thereof.
The Company's common stock is listed on a prescribed exchange and therefore will
be taxable Canadian property to a non-resident holder if, at any time during the
period of five years immediately preceding the disposition, the non-resident
holder, non-arms length persons, or the non-resident together with all such
persons owned not less than 25% of the issued shares of any class of the capital
stock of the Company.


                                       17
<PAGE>

In the case of a non-resident holder to whom shares of the Company represent
taxable Canadian property and who is resident in the United States, no Canadian
taxes will be payable on a capital gain realized on such shares by reason of the
Treaty unless the value of such shares is derived from real property or natural
resources situated in Canada. However, in such case, certain transitional relief
under the Treaty may be available. In certain circumstances, the Treaty allows
Canada to tax former residents on gains from the disposition of taxable Canadian
property where such property was owned at the time of their departure from
Canada or was received in substitution therefor in a transaction that is
tax-free under Canadian law.

ITEM 8. SELECTED FINANCIAL DATA

SUMMARY FINANCIAL INFORMATION

The summary financial information set forth below is derived from the more
detailed consolidated financial statements and notes thereto appearing elsewhere
in this Form 20-F. The Company maintains its books and records in Canadian
Dollars, but has reconciled such financial data to United States dollars (see
'Exchange Rate Data') and has prepared its consolidated financial statements
contained in this Form 20-F in accordance with generally accepted auditing
standards in the United States. See 'Report of Independent Auditors' and
'Consolidated Financial Statements.' All information should be read in
conjunction with the consolidated financial statements of the Company and the
notes contained elsewhere in this Form 20-F.


                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31
                                                     ----------------------

                                                  1996        1997        1998
                                                 -------     -------     -------

                                              (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                              <C>         <C>          <C>
Revenue                                          $14,182     $22,128      35,350

Gross Profit                                       2,807       6,450      11,495

Net Income                                           457       1,045       3,279

Net Income Per Share (Diluted)                      0.11        0.22        0.59
</TABLE>

<TABLE>
<CAPTION>
                                                           DECEMBER 31
                                                           -----------

Balance Sheet Data:                               1996        1997        1998
                                                 -------     -------     -------
<S>                                              <C>         <C>         <C>
Working capital                                  $ 3,317     $10,235     $12,408

Total assets                                      16,773      33,922      43,504

Long-term debt                                     1,081       2,865       2,696

Total liabilities                                 13,610      23,327      29,211

Shareholders' equity                               3,163      10,595      14,292
</TABLE>

ITEM 9. MANAGEMENT's DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
        OF OPERATIONS.

      The statements contained in this Form 20-F that are not historical are
forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, including statements regarding the
Company's expectations, intentions, beliefs or strategies regarding the future.
Forward looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward looking statements included in this Form-20F are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward looking statements.

      The Company's future success as a manufacturer and distributor of
value-priced, stone-set jewelry will be influenced by several factors including
technological developments in the mass production of jewelry, the ability of the
Company to efficiently meet the design and production requirements of its
customers, and the market acceptance of its jewelry. Further factors impacting
the Company's operations are increases in expenses associated with continued
sales growth, the ability of the Company to control costs, management's ability
to evaluate the public's tastes and


                                       19
<PAGE>

orders to target satisfactory profit margins, the ability to develop and manage
the introduction of new designed products, and competition. Quality control is
also essential to the Company's success, since customers demand compliance with
design and product specifications and consistency of production.

      The Company's utilization of its high-volume manufacturing techniques
sometimes results in excess inventories. In the past, the Company either sold
these excess inventories in lots at prices which usually resulted in losses of
its investment in labor and overhead and without recovering its full cost of
stones, or it internally recycled the metal and most stones by disassembling the
product, re-melting the gold or silver and removing the stones. This recycling
resulted in additional incurred labor and overhead costs.

      The Company entered into a relationship with Diamante Fine Jewellery
Limited ("Diamante") to handle its excess inventory. Diamante established
Oromart, which has four retail jewelry stores. Once Diamante established its
factory outlet stores, it provided the Company with an opportunity to sell its
excess inventories on more favorable terms. The Company, by selling to Diamante
then avoided the costs and losses that it had incurred in the past and afforded
it a more advantageous method of dealing with its excess inventories. The
Company is the primary supplier of product to Diamante and the Company's account
receivable from Diamante is fully secured by all the assets of Diamante, which
security interest has been pledged by the Company to The Bank of Nova Scotia for
the Company's financing facilities. The Company performs certain administrative
functions for Diamante.

      Generally, the Company does not provide products pursuant to long-term
contracts. The Company has an exclusive jewelry supply contract with Zellers,
Inc. of Canada ("Zellers") that, pursuant to its terms, is to terminate in
December 2005. Sales to Zeller's were $1.6 million in 1996, $550,000 in 1997 and
$1,814,000 in 1998.

      On November 21, 1997, the Company acquired substantially all of the assets
of the wholesale jewelry division of Litton Systems, Inc., which division had
operated under the trade name Diamonair, for approximately $5.8 million. The
acquisition was accounted for using the purchase accounting method. In
accordance with the purchase accounting method, Diamonair's results have been
included in the Company's consolidated financial statements since the
acquisition date.

      Sales of Diamonair products in 1998 on a non-consolidated, unaudited basis
were $7,560,993 and the profit margin was approximately 41%. Diamonair purchased
products from approximately 20 suppliers. The Company believes that it was able
to increase the profit margin on Diamonair products sold by the Company by
increasing the amount of Diamonair products manufactured by the Company using
the D.G. Manufacturing Process. The Company has increased sales of Diamonair
products by introducing the Diamonair products into the distribution lines used
by the D.G. Division and the Aviv Divisions.

      On February 10, 1998, the Company completed its acquisition of
substantially all of the assets of Aviv, Inc., by assuming approximately $4.3
million in debt. The effective date of the acquisition was June 1, 1997. The
acquisition was accounted for using the purchase accounting method. In
accordance with the purchase accounting method, Aviv's results have been
included


                                       20
<PAGE>

within the Company's consolidated financial statement since the effective date
of the acquisition on June 1, 1997.

      Of Aviv's total sales of approximately $10.3 million, approximately $1.2
million were attributable to the New York Gold and Diamond Exchange, a retail
store at Aviv's facilities in Houston, Texas. The Company does not anticipate
that the cost of many of the Aviv products will be reduced significantly by the
D.G. Manufacturing Process. Aviv's products generally are made with more
expensive metals and stones than the Company's other products. Therefore,
savings in the manufacturing process do not result in unit cost reductions that
are material in relation to the total price of the Aviv jewelry. The Company
also intends to increase sales of Aviv products by introducing the Aviv products
to the distribution lines used by the D.G. Division and Diamonair Division.

      Currently, the Company is reviewing its administrative costs to determine
if there are areas where expenses could be reduced through further integration
and consolidation of the acquisitions. Although the Company expects to achieve
some level of consolidation, these potential cost reductions are limited in many
areas because (i) operating in the United States and Canada limits the
advantages of consolidating certain accounting and human resources functions and
(ii) Management believes that maintaining the existing Aviv and Diamonair sales
offices and manufacturing facilities will be beneficial for maintenance of those
divisions' existing customer relationships and will increase the Company's
opportunities in the United States.

      Fluctuations in the Canadian dollar against other currencies, especially
the U.S. dollar, may have a material effect on the Company's results of
operations. A substantial portion of the Company's sales and purchases are set
in U.S. dollars or are influenced by local currency against the U.S. dollar. To
date, the Company has not sought to hedge the risks associated with fluctuations
in exchange rates and does not a have a policy relating to hedging.

      Many computer systems and software products worldwide will not function
properly as the year 2000 approaches due to the common programming device of
using just the last two digits of a year in all dates. Currently, the Company
has installed new computer systems at both DG and Diamonair and is completing
implementation and conversion to avoid this problem. The Company expects to
implement any necessary changes in Fiscal 1999. The Company does not believe
that the costs of implementing any additional necessary changes to its computer
systems will have a material adverse effect on the Company.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996

      Sales for the year ended December 31, 1997 (AFiscal 1997) were $22.1
million, as compared to $14.2 million for the year ended December 31, 1996
(AFiscal 1996"). This $7.9 million, or 56%, increase was primarily due to the
addition of Aviv revenue of $7.3 million and Diamonair revenue of $3.8 million.
Revenue from the D.G. Division decreased by $3.2 million due to a change in the
product and customer mix, which resulted in lower volumes or more expensive,
higher margin goods being sold in Fiscal 1997.


                                       21
<PAGE>

      Cost of sales increased to $15.7 million in Fiscal 1997 as compared to
$11.4 million in Fiscal 1996. This $4.3 million, or 38%, increase was primarily
due to the increase in sales. Gross margin (which is gross profit primarily
expressed as a percentage of sales) increased to 29% in Fiscal 1997 from 20% in
Fiscal 1996. Gross margin increased due to a change in the product and customer
mix discussed above.

      Selling, general and administrative costs increased to $3.7 million in
Fiscal 1997 from $1.1 million in Fiscal 1996. This $2.6 million, or 26%,
increase is due to the increased expenses associated with operating from
multiple locations and being a public company. In particular, professional fees
increased by $750,000 due to costs associated with being a public entity and
transaction costs associated with the acquisitions. Executive salaries increased
by $417,000, partially due to the increase in executives required to operate in
three locations.

      Interest and other expenses increased to $1.2 million in Fiscal 1997 from
$923,000 in fiscal 1996. Interest expense increased by $26,000 in Fiscal 1997 to
822,000 as a result of increased borrowings, however the Company's weighted
average interest rate was reduced from 6.58% in Fiscal 1996 to 5.42% in Fiscal
1997. Other expenses increased primarily due to a $280,000 write down of
receivables from Zellers.

      Due to increased income before taxes, the Company's taxes increased to
$541,000 from $296,000. However, the Company's effective tax rate was reduced to
34% from 39% due to the increase in the percentage of income from U.S.
operations, which has a lower tax rate than Canada.

      As a result of the foregoing, net income increased to $1.0 million in
Fiscal 1997 from $457,000 in Fiscal 1996.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1997

      Sales for fiscal 1998 increased by $13,222,199 compared to fiscal 1997.
This increase of 59.8% was a result of the successful integration of the Aviv
and Diamonair acquisitions, as well as the increase in revenues from alternative
customers, such as ValueVision. Gross profit increased by $5,044,889 and
represented 32.5% of sales as compared to 29.1% in Fiscal 1997. Operating
expenses increased to approximately$4,912,686 for the year ended December 31,
1998 compared to $3,651,550 for the year ended December 31, 1997. Operating
expenses represented 13.9% of revenues in Fiscal 1998 compared to 16.5% in
Fiscal 1997. This improvement was the result of the Company's ability to control
general and administrative costs which were only partially offset by increases
in selling expenses.

      Interest expenses increased by approximately $998,000 as a result of
increased financing to service the Company's growth. Other expenses increased by
$698,525 from $389,533 to $1,088,058 primarily as a result of the Zeller's
settlement. The Company had other income of $1,082,239 in fiscal 1998, primarily
as a result of the Zeller's settlement.

      Income before income taxes was $4,756,061 compared to $1,586,657, an
increase of $3,165,404 or approximately 200%. As a result of the higher income,
income taxes increased from $541,423 to $1,477,369 in Fiscal 1998. Net income
was $3,278,692 in Fiscal 1998 as compared to net income of $1,045,234 in Fiscal
1997. This was an increase of 214%.


                                       22
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      In April 1997, the Company completed an initial public offering in which
it sold 1,265,000 shares of Common Stock and 1,265,000 Warrants. The Company
realized net proceeds of $6.7 million from this offering. The Company may
realize additional proceeds from the exercise of the Warrants, although there
can be no assurance that such Warrants will be exercised.

      The Company currently has an operating line of credit with The Bank of
Nova Scotia in the amount of $20.3 million subject to certain margin
requirements. The amount available to the Company is equal to 75% to 80% of
"eligible accounts receivable", as defined in the Line of Credit Agreement, plus
50% of the inventory values up to a maximum advance against inventory of
approximately $9.7 million. The Company utilized the credit line to borrow the
$5.8 million and $4.3 million necessary for the acquisitions of Diamonair and
Aviv, respectively.

      The Company's borrowings under the Line of Credit bear interest at
Canadian prime plus 1/2% which at March 31, 1999 amounted to 6.5%. Interest on
any borrowings is payable monthly. The Company is in full compliance with all of
the banking covenants (including the financial covenants and ratios) and is
required to report to its bankers on a monthly basis.

      The Company's obligations under the revolving credit facility are secured
by a security interest on all the assets of the Company, guaranteed by Diamante,
a jewelry retail chain owned by a Vice President of the Company and further
secured by a mortgage on the property owned by a limited partnership controlled
by Jack Berkovits and leased to the Company, which mortgage is guaranteed by the
Company.

      For the year ended December 31, 1998, the Company used cash from operating
activities of $5.1 million, primarily due to an increase of accounts receivable
of $2.7 million and an increase in inventory of $9.7 million.

      The Company's accounts receivable net of allowances for doubtful accounts
as of December 31, 1998 was $17.6 million, or 50% of revenue for Fiscal 1998.
Accounts receivable is such a large percentage of sales because (i) accounts
receivable include a 7% goods and services tax and a 10% federal excise tax on
most Canadian sales, which taxes are not included in sales (ii) sales volume in
the fourth quarter was higher than the rest of the year due to the acquisitions
during the year of Aviv and Diamonair (iii) sales volume is generally higher in
the fourth quarter and some customers do not pay the Company for goods until
after the holiday selling season.

      The Company's inventory as of December 31, 1998 was $20.9 million, or 59%
of revenue for Fiscal 1998. Inventory is such a large percentage of sales
because the inventory reflects needs for all three divisions for their
anticipated expansion and growth in 1999.

      At December 31, 1998, the Company had loans outstanding to its principal
shareholder, Jack Berkovits, of $2.0 million and such loans bear interest at 10%
per annum.

      In May 1999, the Company sold an aggregate of 615,385 shares to an
investor in a private placement. This private placement resulted in net proceeds
of approximately $3,700,000. The Company also issued an aggregate of 172,308
warrants in connection with the private placement.

      The Company anticipates that cash flow from operations, as well as
borrowings available


                                       23
<PAGE>

under the Company's existing credit line will be sufficient to satisfy the
Company's credit needs for the next twelve months. In addition, the Company may
sell equity securities to raise additional capital as needed.

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.

MANAGEMENT

The directors and executive officers of the Company are as follows.

<TABLE>
<CAPTION>
          NAME                  AGE  POSITION WITH THE COMPANY       POSITION HELD SINCE
<S>                             <C>  <C>                                    <C>
Samuel J. Berkovits........     47   Chairman of the Board, CEO and         1979
                                     President

Gary Davis.................     51   Vice President--Finance, Chief         1987
                                     Financial Officer, Controller,
                                     Treasurer, Secretary

Leonard Fasullo............     58   Vice President--Production             1989

Meyer Feiler...............     46   Director                               1998

Theodore L. Bonsignore.....     52   General Manager-Diamonair,             1998
                                     Director

Ronald Rutman .............     46   Director                               1999
</TABLE>

      SAMUEL JACOB "Jack" Berkovits has served as President and a director of
the Company since 1979. He is a founding member of the Jeweller's Vigilance
Committee (Canadian Jeweler's Association) and is active in community affairs.
Mr. Berkovits became a member of the Canadian Institute of Chartered Accountants
in 1976. He practiced as an accountant in Montreal from 1972 to 1977 when he
joined the Company.

      GARY DAVIS has served as Chief Financial Officer and Vice President -
Finance of the Company since 1987. Prior to that, Mr. Davis served for 12 years
as Chief Financial Officer at a Canadian company engaged in manufacturing
jewelry. Mr. Davis has been a certified general accountant since 1972.

      LEONARD FASULLO has been Vice President - Production of the Company since
1989. Mr. Fasullo joined the Company as a manufacturing foreman in 1984.


                                       24
<PAGE>

      THEODORE L. BONSIGNORE has served as General Manager of Diamonair since
May, 1998 and as a Director of the Company since July 1998. Mr. Bonsignore works
for the Company an average of between fifteen - to twenty hours a week and also
operates T.L. Bonsignore Management and Advisory Services, a consulting firm
specializing in the jewelry industry. From 1975 to 1997, Mr. Bonsignore was
employed by Krementz & CO., a jewelry manufacturer, serving as President since
1990. Mr. Bonsignore has been a director of the Jewelers Board of Trade since
1990 and has served as Chairman of that Board since 1998. Mr. Bonsignore is a
certified public accountant.

      MEYER FEILER has been President of Carmen Incorporated, one of the largest
jewelry companies in Canada since 1993. Mr. Feiler has worked at Carmen
Incorporated since 1979.

      RONALD RUTMAN has served a a Director of the Company since March 1999. Mr.
Rutman is a Chartered Accountant with the firm of Zeifman & Company where he is
a partner. Mr. Rutman has been with Zeifman & Company since 1973. Mr. Rutman
specializes in taxation, consulting and bank finance. He has a particular
expertise in the jewelry and health care industries. He has a B.A. from the
University of Toronto.

      There is no family relationship between any of the above named officers or
directors.

      The term of office for directors and officers is one year.

AUDIT AND COMPENSATION COMMITTEES

The Audit Committee consists of Messrs. Rutman, Berkovits and Feiler. The
responsibilities of the audit committee include recommending to the board of
directors the firm of independent auditors to serve the Company, reviewing the
independent auditors reports, services and results of audit, and reviewing the
scope, results and adequacy of the Company's internal control procedures. The
Compensation Committee consists of Messrs. Berkovits, Rutman and Feiler. The
compensation committee is expected to periodically review and evaluate officers'
compensation and will administer the Company's 1998 Stock Option Plan.

      For a period of three years after the effective date of the Company's
Initial Public Offering on April 17, 1997, the Company has agreed to invite a
designee of Dillon to attend all meetings of the board of directors, but such
designee will not be entitled to vote or be compensated.

      It is not expected that any director or committee member will receive any
compensation for acting in such capacity. The Company will reimburse directors
and committee members for all ordinary and necessary expenses incurred in
attending any meeting of the board or any committee thereof.

ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.

EXECUTIVE COMPENSATION

      The Summary Compensation Table below sets forth compensation paid by the
Company and its subsidiaries for the last three fiscal year for services in all
capacities for its CEO and any other officer who received a total annual salary
and bonus from the Company which exceeded $100,000.

SUMMARY COMPENSATION TABLE


                                       25
<PAGE>

      The following table sets forth all cash compensation for services rendered
in all capacities to the Company, for the fiscal years ended December 31, 1998,
December 31, 1997 and December 31, 1996 paid to the Company's Chief Executive
Officer, and the two other most highly compensated executive officers (the
"Named Executive Officers") at the end of the above fiscal years whose total
annual salary plus bonus exceeded $100,000 per annum.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
        NAME AND                 YEAR/                                      RESTRICTED
        PRINCIPAL                PERIOD              ANNUAL                   STOCK     OPTIONS/       OTHER
        POSITION                 ENDED            COMPENSATION       BONUS    AWARDS      SARS      COMPENSATION
        --------                 -----            ------------       -----    ------      ----      ------------
---------------------------------------------------------------------------------------------------------------
<S>                        <C>                 <C>                   <C>            <C>    <C>      <C>
Jack Berkovits, Chief      1998                $216,951              125,000        0      266,000  $12,000(1)
Executive Officer          1997                $197,242              187,798        0      377,500  $12,000(1)
and Chairman...........    1996                $147,061                             0               $12,000(1)
                                                                                                 0
---------------------------------------------------------------------------------------------------------------

Gadi Beer, Vice President  1998                $196,755                             0       10,000   $7,710(3)
of Sales and Marketing     1997(2)             $109,375                             0            0
Aviv...................    1996                                                     0            0
---------------------------------------------------------------------------------------------------------------
</TABLE>

1.    Represents monthly auto allowance.
2.    Mr. Beer's employment with the Company commenced on June 1, 1997, after
      the Company's acquisition of Aviv.
3.    Represents car allowance of $5,628 and health insurance of $2,082.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT CHANGE AND CHANGE-IN-CONTROL
ARRANGEMENTS

      Jack Berkovits and the Company entered into a three year employment
agreement commencing April 17, 1997 for Mr. Berkovits to serve as Chief
Executive Officer and President at an annual salary of $250,000 with yearly
increases of no less than $10,000. Should Mr. Berkovits die during the term of
this agreement, his estate or designee shall receive, upon his death, two years
full salary. In the event of disability, Mr. Berkovits is to receive 70% of his
salary for the remainder of the term of the agreement. The agreement also
provides for the Company to maintain approximately $2,000,000 in key-man
insurance on the life of Mr. Berkovits. Currently, the Company is beneficiary of
two "key-man" term policies with a total death benefit of $840,000. The $700,000
policy has been assigned to secure the Company's financing facilities with The
Bank of Nova Scotia. The Company maintains a third policy with a death benefit
of $1.1 million for which Mr. Berkovits is the beneficiary.

      Based upon any wrongful termination, which includes changes in control of
the Company through an acquiring person (any person who has acquired or
announces a tender offer or exchange for 25% of the Company), a sale of
substantially all of the assets or merger, acquisition of the Company or its
consolidation with another, or certain types of board changes, the Company shall
pay Mr. Berkovits a lump sum payment, based upon his then compensation,
including benefits and perquisites, from such termination. Such payment shall be
the balance of his compensation for the remainder of the term or compensation
for one year whichever is less; provided, if the payment is in excess of
$100,000, then such excess shall be payable in equal quarterly payments with
interest at the legal rate. The employment agreement also contains a one-year
non-competition provision within a 200 mile radius of the Company's primary
operation in Canada or anywhere in the United States.


                                       26
<PAGE>

      The Company entered into an employment agreement with Gadi Beer, the
Vice-President of Sales and Marketing of Aviv for a term of one year terminating
on February 9, 2000. Mr. Beer earns an annual base salary of $120,000 and is
entitled to receive 0.8% of the total sales of Aviv. Mr. Beer has agreed to a
covenant not to compete with the Company for a period of three years from the
date of termination of the agreement. The agreement is renewable for additional
successive one year terms upon the consent of both parties.

      No other officer has an employment contract with the Company.

COMPENSATION OF DIRECTORS

      There are no standard arrangements for the payment of any fees to
directors of the Company for acting in such capacity. Directors are reimbursed
for expenses for attending meetings.

      The Company has adopted a 1998 Stock Option Plan pursuant to which options
have been granted to officers, directors, consultants, key employees, advisors
and similar parties who provide their skills and expertise to the Company.

ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.

      In December 1996, the board of directors and shareholders adopted the 1996
D.G. Jewelry of Canada Ltd. Stock Option Plan (the "1996 Plan"), pursuant to
which 500,000 shares of Common Stock are provided for issuance. All of such
options have been granted.

      In February 1997, the Board granted 172,500 Options under the 1996 Plan to
20 persons, including officers, directors and key employees. The Options were to
be exercisable at $4.50 per share for five years expiring February 9, 2002. On
August 22, 1997, the Compensation Committee lowered the exercise price to $1.38,
which was the Company's stock price on such date. On August 22, 1997, the
Company granted an additional 327,500 options exercisable at $1.38 per share to
Jack Berkovits. All options granted vest at the rate of 25% every six months so
that the options are fully vested two years from their issuance date. The table
below reflects the Options under the 1996 Stock Option Plan granted to the
present officers and directors of the Company and the percentage of Options
issued to such persons.

<TABLE>
<CAPTION>
     OFFICER AND/OR DIRECTOR      EXPIRATION DATE      OPTIONS   PERCENT     EXERCISE PRICE
     -----------------------      ---------------      -------   -------     --------------
<S>                               <C>                  <C>        <C>            <C>
Jack Berkovits.................   (1)                  377,500    75.5%          $1.38

Gary Davis.....................   02/09/02              15,000    3.0%           $1.38

Leonard Fasullo................   02/09/02              15,000    3.0%           $1.38
-------------------------------------------------------------------------------------------
</TABLE>

----------
(1)   327,500 of such options expire on August 21, 2002 and 50,000 expire on
      February 9, 2002.

      In July 1998, the Board granted 500,000 options to 42 persons including
officers, directors, consultants and key employees. The options were exercisable
at the following prices;


                                       27
<PAGE>

$2.77 (410,000); $3.25 (40,000); and $4.00 (50,000). All Options under the 1998
Stock Option Plan granted vest at the rate of 25% every six months so that the
options are fully vested two years from their issuance date. The table below
reflects the Options under the 1998 Stock Option Plan granted to the present
officers and directors of the Company and the percentage of Options issued to
such persons.

<TABLE>
<CAPTION>
OFFICER AND/OR DIRECTOR       EXPIRATION DATE    OPTIONS      PERCENT       EXERCISE PRICE
-----------------------       ---------------    -------      -------       --------------
<S>                           <C>                  <C>         <C>              <C>
Jack Berkovits.............   07/14/03             266,000     53.2%            $2.77

Gary Davis.................   07/14/03             20,000       4.0%            $2.77

Leonard Fasullo............   07/14/03             20,000       4.0%            $2.77

Theodore L. Bonsignore        07/14/03             10,000       2.0%            $2.77

Myer Feiler                   07/14/03             60,000      12.0%            $ (1)

------------------------------------------------------------------------------------------
</TABLE>

(1)   10,000 of such opinions are exercisable at $2.77 and the remaining 50,000
      are at $4.00 per share.

ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.

      In February 1995, the Company entered into a 10 year lease consisting of
23,000 square feet for its executive offices and manufacturing operations in
North York, Ontario. The lease is with 1001 Petrolia Road Limited Partnership
("Petrolia L.P."), the general partner being 1013418 Ontario Inc. Jack
Berkovits, Chairman, CEO and President of the Company, is the sole owner,
officer and director of that general partner. Current rent is $107,948 and
increases each year by the greater of $.37 a square foot or the percentage
increase in the Consumer Price Index for the Municipality of Metropolitan
Toronto. Additionally, the Company is paying real estate taxes, utilities and
insurance aggregating $95,000 per year for this facility. See Item 2 -
Description of Property. Management is of the opinion that the lease is on terms
as favorable as obtainable from unaffiliated third parties.

      Petrolia L.P. through 1013418 Ontario, Inc., the general partner, owned by
Mr. Berkovits, had obtained a five year $660,000 mortgage on the property, which
was renewed in October 1998. On April 30, 1999, the principal amount outstanding
was $515,661. The Company is a guarantor of this mortgage.

      Jack Berkovits loaned the Company monies from time to time for operations
and working capital which sums at April 30, 1999 aggregated approximately $2.0
million and the weighted average interest rate was 10%. In 1997, the Company
repaid $1.2 million of such loans, including payments to a third party, Laurbrad
Holdings Limited, who had loaned funds to Mr. Berkovits. Mr. Berkovits loaned
the funds to the Company on the same terms, which included a 20% annual interest
rate. The rate has now been reduced to 10%.

      Diamante is a Canadian company operating under the name Oromart which has
four retail jewelry stores and operates jewelry departments in six Best Value
Discount Stores. Diamante is owned by a Vice President of the Company, Leonard
Fasullo, who is also Diamante's President (since 1998). The inventory provided
to Diamante, consists primarily of manufacturing surplus, returns or refurbished
jewelry, and on occasion gold chains and watches purchased by the Company for
resale to Diamante. The inventory is secured by a registered security agreement
covering the assets of Diamante, which security agreement has been assigned


                                       28
<PAGE>

to The Bank of Nova Scotia which holds a substantial security interest in the
assets of the Company. Diamante has guaranteed the Company's bank financing and
provided the bank with a direct security interest in its assets. The Company
consolidated, for financial reporting purposes, with Diamante until February 7,
1997, the termination date of the agreement with Diamante reflecting the
Company's control over that retail operation. The Company performs certain
administrative functions for Diamante.

      Diamante leases each facility for its four stores, of which one lease is
guaranteed by the Company. This lease is terminable by Diamante on 90 days
written notice, and is for five years, is a net, net lease, with renewal options
for a rental rate of approximately $17,000 per year plus taxes, maintenance,
insurance and utilities.

      In connection with the purchase of Aviv, the Company agreed to issue the
former owners of Aviv an amount of shares having a value of $325,000 based on
the average closing price in April 1999 in settlement of a note in that amount.
Based on the closing prices the Company will issue an aggregate of 45,145
shares. All of the former owners are presently employees of the Company

      The Company has entered into a supply agreement with Xite Jewelry.Com,
Inc. ("Xite"), which is a newly formed company owned 50% by the Company and 50%
by two sons of Jack Berkovits. The agreement provides that Xite will purchase
jewelry from the Company on the best terms offered to the Company's other
customers. In turn, Xite will sell such jewelry to or through certain internet
companies who have previously entered into arrangements with the Company. The
Company has assigned certain internet contracts to Xite. To date, sales through
the internet do not represent a significant percentage of total sales. Xite has
entered into a letter of intent with a broker-dealer to effect a public offering
of its common stock. There can be no assurance that such public offering will be
effectuated or what the terms of such offering would be.

      All transactions between the Company, its officers, directors, principal
shareholders or affiliates are, in the opinion of management, except for the
interest rate charges on a portion of Mr. Berkovits' loans which are above the
market rate, on terms no less favorable to the Company then may be obtained from
unaffiliated third parties. All future transactions and loans between itself and
its officers, directors and 5 % shareholders to be on terms no less favorable
than could be obtained from independent, unaffiliated parties and will be
approved by a majority of the independent, disinterested directors of the
Company.


                                       29
<PAGE>

PART II.

ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not applicable.

                                    PART III

ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.

ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
Not applicable.


                                       30
<PAGE>

                                    PART IV.

ITEM 17. FINANCIAL STATEMENTS
See Pages F-1 to F-19

ITEM 18. FINANCIAL STATEMENTS
Not applicable.

ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.

(a).  See the Exhibit to the Financial Statements on Page F-1.

(b).  Exhibit Index

Exhibit
Number      Description
------      -----------

3(a)        Articles of Incorporation+

(b)         By-laws of the Company+

4(a)        Form of Common Stock Certificate of the Company+

(b)         Form of Redeemable Common Stock Purchase Warrant+

(c)         Form of Underwriters' Options+

(d)         Form of Warrant Agreement between the Company, American Stock
            Transfer & Trust Co. and Joseph Dillon & Company, Inc.+

10(a)       Lease between 1013418 Ontario Inc., In Trust and the Company dated
            February 1, 1995+

(b)         Operating Credit Line between the Company and The Bank of Nova
            Scotia dated July 15, 1996+

(c)         Security Agreement between the Company and The Bank of Nova Scotia
            dated November 21, 1994+

(d)         General Assignment by the Company to The Bank of Nova Scotia dated
            November 21, 1994+

(e)         Assignment of keyman life insurance by the Company to The Bank of
            Nova Scotia dated November 29, 1994+

(f)         Priority Agreement between the Company, The Bank of Nova Scotia,
            Laurbrad Holdings Limited and Jack Berkovits dated December 1, 1995+


                                       31
<PAGE>

(g)         Priority Agreement between The Bank of Nova Scotia, Jack Berkovits
            and Laurbrad Holdings Limited dated December 1, 1995+

(h)         Priority Agreement between the Company, The Bank of Nova Scotia and
            Jack Berkovits dated December 1, 1995+

(i)         Pledge and Assignment of Security Interest held by the Company in
            Diamante Fine Jewellery Limited and The Bank of Nova Scotia dated
            December 1, 1995 including General Security Agreement from Diamante
            Fine Jewellery Limited to the Company dated May 11, 1995.+

(j)         Guarantee of payment by 1013418 Ontario, Inc. to The Bank of Nova
            Scotia dated November 21, 1994+

(k)         Collateral Mortgage from 1013418 Ontario, Inc. to The Bank of Nova
            Scotia dated November 30, 1994+

(l)         Loan Agreement between the Company and Jack Berkovits dated May 31,
            1995+

(m)         Promissory Note of the Company to Jack Berkovits dated May 31, 1995+

(n)         Security Agreement granted by the Company to Jack Berkovits dated
            May 31, 1995+

(o)         Loan Agreement between the Company, Jack Berkovits and Laurbrad
            Holdings Limited dated November 30, 1995+

(p)         Loan Agreement between the Company and Jack Berkovits dated November
            30, 1995+

(q)         Promissory Note of the Company to Jack Berkovits dated November 30,
            1995+

(r)         Guarantee by the Company of Diamante Fine Jewellery Limited
            Cookstown Mall Lease dated March 24, 1995+

(s)         Guarantee by the Company of Diamante Fine Jewellery Limited St.
            Jacobs Lease dated July 14, 1993+

(t)         Promissory Note of the Company to Sherfam, Inc. dated April 1, 1996+

(u)         Equipment lease between the Company and The Bank of Nova
            Scotia(three equipment leases substantially similar) dated April 29,
            1994+

(v)         General Security Agreement from Diamante Fine Jewellery Limited to
            The Bank of Nova Scotia dated August 4, 1995+

(w)         Diamante Fine Jewellery Limited Guarantee of the Company's Bank
            Financing dated August 1, 1995+


                                       32
<PAGE>

(x)         Agreement between the Company and Diamante Fine Jewellery Limited
            dated May 3, 1995+

(y)         Agreement between Rent-A-Center and the Company dated November 20,
            1996, as clarified by letter dated December 13, 1996+

(a)(a)      1996 Stock Option Plan of the Company+

(a)(b)      Form of Stock Option Certificate under 1996 Stock Option Plan+

(a)(c)      Form of Lock-Up Letter by Jack Berkovits, the Berkovits Family Trust
            and Mr. Berkovits' two sons+

(a)(d)      Employment Agreement between the Company and Jack Berkovits dated
            December 20, 1996, as amended+

(a)(e)      Recission Agreement between the Company and Diamante Fine Jewellery
            Limited dated February 7, 1997+

(a)(f)      Purchase and Sale Agreement between Diamonair, Inc. and Litton
            Systems, Inc. dated November 21, 1997.+

(a)(g)      Asset Purchase Agreement between the Company and Aviv, Inc. dated
            February 10, 1998.+

(a)(h)      Employment Agreement between the Company and Gadi Beer dated
            February 10, 1998.+


+ Documents previously filed with the Company's Registration Statement and Post
Effective Amendment thereto.


                                       33
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, hereunder duly authorized.


                                      For and on Behalf of

                                      D.G. JEWELLERY OF CANADA LTD.


                                      By: /s/ GARY DAVIS
                                          --------------------------------------
                                              Gary Davis
                                              Vice President-Finance and Chief
                                              Financial Officer


Date: June 18, 1999


                                       34
<PAGE>

                          D.G. JEWELLERY OF CANADA LTD.

                        CONSOLIDATED FINANCIAL STATEMENTS

                  AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996

                         TOGETHER WITH AUDITORS' REPORT


                                TABLE OF CONTENTS

       Report of Independent Auditors                                     F-1

       Consolidated Balance Sheet                                         F-2

       Consolidated Statement of Income                                   F-3

       Consolidated Statement of Cash Flows                               F-4

       Consolidated Statement of Stockholders' Equity                     F-5

       Notes to Consolidated Financial Statements                    F-6 - 18
<PAGE>

                   [Letterhead of Schwartz Levitsky Feldman]


                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholders of
D.G. Jewellery of Canada Ltd.


We have audited the accompanying consolidated balance sheets of D.G. Jewellery
of Canada Ltd. (incorporated in Canada) and subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of income, cash flows and
changes in stockholders' equity for the years ended December 31, 1997 and 1996.
These consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of D.G. Jewellery of Canada Ltd.
and subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for the years ended December 31, 1997 and 1996,
in conformity with generally accepted accounting principles in the United States
of America.


Toronto, Ontario                                   /s/ Schwartz Levitsky Feldman
March 5, 1998                                              Chartered Accountants
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)

<TABLE>
<CAPTION>
                                                              1997                1996
                                                                $                   $
<S>                                                     <C>                  <C>
                                          ASSETS
CURRENT ASSETS

    Accounts receivable (notes 3, 8 and 10)             17,197,875           8,871,980
    Inventory (notes 4, 8 and 10)                       12,852,760           6,779,338
    Cash surrender value of life insurance (note 5)        476,445                  -
    Prepaid expenses and sundry assets                     169,696              67,267
                                                        ----------          ----------
                                                        30,696,776          15,718,585

DEFERRED COSTS OF PUBLIC ISSUE                                  -              131,777

PROPERTY, PLANT AND EQUIPMENT (notes 6, 8 and 10)        1,888,148             744,661

GOODWILL (note 7)                                        1,336,609             177,963
                                                        ----------          ----------

                                                        33,921,533          16,772,986
                                                        ==========          ==========
</TABLE>

<PAGE>

D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)

<TABLE>
<CAPTION>
                                                                               1997                1996
                                                                                 $                   $
<S>                                                                      <C>                 <C>
                                   LIABILITIES
CURRENT LIABILITIES

    Bank indebtedness (note 8)                                           12,120,832           8,321,794
    Accounts payable and accrued expenses (note 9)                        3,891,394           1,982,423
    Income taxes payable                                                  1,008,548             593,402
    Current portion of loans payable (note 10)                            3,441,109           1,195,936
    Class B redeemable special stock (note 11)                                   -               81,067
    Other loan                                                                   -              226,989
                                                                         ----------          ----------

                                                                         20,461,883          12,401,611

LOANS PAYABLE (note 10)                                                   2,864,997           1,080,838

DEFERRED INCOME TAXES (note 12)                                                  -              127,138
                                                                         ----------          ----------

                                                                         23,326,880          13,609,587
                                                                         ----------          ----------

COMMITMENTS AND CONTINGENCIES (notes 16 and 17)

                              STOCKHOLDERS' EQUITY

COMMON STOCK (note 13)                                                    6,700,827                  84

CUMULATIVE TRANSLATION ADJUSTMENTS                                        (359,434)            (44,711)

RETAINED EARNINGS                                                         4,253,260           3,208,026
                                                                         ----------          ----------

                                                                         10,594,653           3,163,399
                                                                         ----------          ----------

                                                                         33,921,533          16,772,986
                                                                         ==========          ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                                                             F-2
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)

<TABLE>
<CAPTION>
                                                             1997           1996

                                                              $              $
<S>                                                    <C>            <C>
Net sales                                              22,127,825     14,181,540

Cost of sales                                          15,677,870     11,374,603
                                                       ----------     ----------

Gross profit                                            6,449,955      2,806,937

Operating expenses
    Selling                                             1,188,308        588,809
    General and administrative                          2,463,242        541,456
                                                       ----------     ----------

                                                        3,651,550      1,130,265
                                                       ----------     ----------

Operating income                                        2,798,405      1,676,672
                                                       ----------     ----------

Interest expenses                                         822,215        796,412
Other expenses                                            389,533        127,086
                                                       ----------     ----------

                                                        1,211,748        923,498
                                                       ----------     ----------

Income before income taxes                              1,586,657        753,174

Provision for income taxes (note 12)                      541,423        296,146
                                                       ----------     ----------

Net income                                              1,045,234        457,028
                                                       ==========     ==========

Earnings per common share                                    0.22           0.11
                                                       ==========     ==========

Earnings per common share assuming dilution                  0.22           0.11
                                                       ==========     ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                                                             F-3
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)

<TABLE>
<CAPTION>
                                                                      1997           1996
                                                                       $              $
<S>                                                            <C>             <C>
Cash flows from operating activities:
    Net income                                                   1,045,234        457,028
                                                               -----------     ----------

    Adjustments to reconcile net income to
    net cash (used in) provided by
    operating activities:
         Amortization                                              389,603        197,054
         Increase in accounts receivable                        (8,325,895)    (1,848,027)
         Increase in inventory                                  (6,073,422)    (1,948,113)
         Increase in cash surrender value
            of life insurance                                     (476,445)          --
         Increase in prepaid expenses
            and sundry assets                                     (102,429)       (64,421)
         Increase in accounts payable
            and accrued expenses                                 1,908,971      1,186,529
         Increase in income taxes payable                          415,146        300,940
         Decrease in deferred income taxes                            --           (5,182)
                                                               -----------     ----------

         Total adjustments                                     (12,264,471)    (2,181,220)
                                                               -----------     ----------

         Net cash used in operating activities                 (11,219,237)    (1,724,192)
                                                               -----------     ----------

    Cash flows from investing activities:
         Purchases of property, plant and
            equipment                                           (1,491,736)      (274,845)
         Purchase of goodwill                                   (1,200,000)          --
         Proceeds from disposal of property,
            plant and equipment                                       --           10,935
                                                               -----------     ----------

         Net cash used in investing activities                  (2,691,736)      (263,910)
                                                               -----------     ----------

    Cash flows from financing activities:
         Proceeds from/(repayment of)
            loans payable                                        3,802,343       (303,488)
         Issuance of capital stock                               6,705,382           --
         Deferred public issue costs                                  --         (131,777)
         Redemption of capital stock                               (81,067)          --
                                                               -----------     ----------

         Net cash provided by (used in) financing activities    10,426,658       (435,265)
                                                               -----------     ----------
</TABLE>
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)

<TABLE>
<CAPTION>
                                                          1997             1996
                                                           $                $
<S>                                                <C>               <C>
Effect of foreign currency exchange
    rate changes                                      (314,723)          20,966
                                                   -----------       ----------

Net increase in bank indebtedness and
    cash equivalents                                (3,799,038)      (2,402,401)
Bank indebtedness and cash equivalents
    - Beginning of year                             (8,321,794)      (5,919,393)
                                                   -----------       ----------

    - End of year                                  (12,120,832)      (8,321,794)
                                                   ===========       ==========

Interest paid                                          822,215          827,864
                                                   ===========       ==========

Income taxes paid                                       43,000             --
                                                   ===========       ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                                                             F-4
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

<TABLE>
<CAPTION>
                                                 Common      Issued and
                                                  Stock     Outstanding                             Cumulative
                                              Number of          Common                 Retained   Translation
                                                 Shares        Warrants     Amount      Earnings   Adjustments
                                                 ------        --------     ------      --------   -----------
                                                                               $             $             $
<S>                                           <C>             <C>        <C>           <C>           <C>
       Balance as of December 31, 1995        3,900,000              -          84     2,750,998      (65,677)

       Foreign currency translation                  -               -          -             -         20,966

       Net income for the year                       -               -          -        457,028            -
                                              ---------       ---------  ---------     ---------     --------

       Balance as of December 31, 1996        3,900,000              -          84     3,208,026      (44,711)

       Common stock issued (note 13)          1,265,000       1,265,000  6,700,743            -             -

       Foreign currency translation                  -               -          -             -      (314,723)

       Net income for the year                       -               -          -      1,045,234            -
                                              ---------       ---------  ---------     ---------     --------

       Balance as at December 31, 1997        5,165,000       1,265,000  6,700,827     4,253,260     (359,434)
                                              =========       =========  =========     =========     ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                                                             F-5
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

1.    BASIS OF CONSOLIDATED FINANCIAL STATEMENTS PRESENTATION

      These financial statements consolidate, using the purchase method, the
      accounts of the company and its two wholly-owned subsidiaries, Diamonair,
      Inc. and Aviv, Inc. All material intercompany accounts have been
      eliminated. Consolidation commenced with the effective dates of
      acquisition of the operations of the subsidiary companies.

      The year ends of the subsidiaries are December 31. Acquisition of the
      operations of the subsidiaries was effected by the purchase of the assets
      and trade name of Diamonair, Inc. from a third party, effective November
      21, 1997, and by the purchase of the assets and trade name of Aviv, Inc.
      from a third party, effective June 1, 1997. The purchases were effected
      through the company's wholly-owned subsidiaries, Diamonair, Inc. and Aviv,
      Inc. and the final documents were signed on November 21, 1997 and February
      10, 1998 respectively.

      Total assets acquired and total liabilities assumed by D.G. Jewellery of
      Canada Ltd. as a result of these acquisitions is as follows:

<TABLE>
<CAPTION>
                                                     AVIV, INC.  DIAMONAIR, INC.
                                                           $                $
<S>                                                  <C>           <C>
      Total assets (exclusive of goodwill)           4,286,000     4,549,000
      Goodwill                                              -      1,200,000
</TABLE>

      The total amount of consideration given by D.G. Jewellery of Canada Ltd.
      as a result of these acquisitions is as follows:

<TABLE>
<CAPTION>
                                                     AVIV, INC.  DIAMONAIR, INC.
                                                           $                $
<S>                                                  <C>           <C>
      Cash                                                  -      5,749,000
      Accounts payable                                 988,500            -
      Loans payable (as described in note 10)        3,297,500            -
</TABLE>

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      i)    Principal Activities

            The company was incorporated in Canada on October 18, 1979. The
            company is principally engaged in the production and trading of
            jewellery in Canada and the United States of America.

      ii)   Bank indebtedness and Cash Equivalents

            Bank indebtedness and cash equivalents include cash on hand, amounts
            due to banks, and any other highly liquid investments purchased with
            a maturity of three months or less. The carrying amount approximates
            fair value because of the short maturity of those instruments.


                                                                             F-6
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

      iii)  Other Financial Instruments

            The carrying amount of the company's other financial instruments
            approximates fair value because of the short maturity of these
            instruments or the current nature of interest rates borne by these
            instruments.

      iv)   Long-term Financial Instruments

            The fair value of each of the company's long-term financial assets
            and debt instruments is based on the amount of future cash flows
            associated with each instrument discounted using an estimate of what
            the company's current borrowing rate for similar instruments of
            comparable maturity would be.

      v)    Accounts Receivable and Accounts Payable

            In certain instances, the company's practice is to sell to and
            purchase from the same entities. In such circumstances, on a
            periodic basis, the payable is set-off against the receivable as
            payment. Until such time as such a set-off occurs, the respective
            receivable and payable amounts are reported on a gross basis. At
            year end, amounts owing to the company from customers who
            participate in this practice was approximately $100,000 ($4.2
            million as at December 31, 1996). Of this amount, $35,000 ($1.5
            million as at December 31, 1996) was owed to these customers as at
            December 31, 1997.

      vi)   Inventory

            Raw materials and work-in-process are valued at the lower of cost
            (first-in, first-out basis) or market.

            Finished goods are valued at the lower of cost or market. Cost is
            calculated using selling price less normal gross margin.

      vii)  Depreciation

            Depreciation is provided over the estimated useful lives of the
            assets, principally using the declining balance method.

      viii) Goodwill

            Goodwill is the excess of cost over the value of tangible assets
            acquired. It is amortized on the straight-line basis over 25 to 40
            years.

      ix)   Sales

            Sales represents the invoiced value of goods supplied to customers.
            Sales are recognized upon delivery of goods and passage of title to
            customers.


                                                                             F-7
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

      x)    Income taxes

            The company accounts for income tax under the provisions of
            Statement of Financial Accounting Standards No. 109, which requires
            recognition of deferred tax assets and liabilities for the expected
            future tax consequences of events that have been included in the
            financial statements or tax returns. Deferred income taxes are
            provided using the liability method. Under the liability method,
            deferred income taxes are recognized for all significant temporary
            differences between the tax and financial statement bases of assets
            and liabilities.

      xi)   Accounting Changes

            On January 1, 1996, the company adopted the provision of SFAS No.
            121, Accounting for the Impairment of Long-Lived Assets and for
            Long-Lived Assets to be Disposed Of. SFAS No. 121 requires that
            long-lived assets to be held and used by an entity be reviewed for
            impairment whenever events or changes in circumstances indicate that
            the carrying amount of an asset may not be recoverable. SFAS No. 121
            is effective for financial statements for fiscal years beginning
            after December 15, 1995. Adoption of SFAS No. 121 did not have a
            material impact on the company's result of operations.

            In December 1995, SFAS No. 123, Accounting for Stock-Based
            Compensation, was issued. It introduced the use of a fair
            value-based method of accounting f0r stock-based compensation. It
            encourages, but does not require, companies to recognize
            compensation expense for stock-based compensation to employees based
            on the new fair value accounting rules. Companies that choose not to
            adopt the new rules will continue to apply the existing accounting
            rules contained in Accounting Principles Board Opinion No. 25,
            Accounting for Stock Issued to Employees. However, SFAS No. 123
            requires companies that choose not to adopt the new fair value
            accounting rules to disclose pro forma net income and earnings per
            share under the new method. SFAS No. 123 is effective for financial
            statements for fiscal years beginning after December 15, 1995. The
            company has adopted the disclosure provisions of SFAS No. 123.

      xii)  Foreign Currency Translation

            The translation of the financial statements from Canadian dollars
            ("CDN $") into United States dollars is performed for the
            convenience of the reader. Balance sheet accounts are translated
            using closing exchange rates in effect at the balance sheet date and
            income and expense accounts are translated using an average exchange
            rate prevailing during each reporting period. No representation is
            made that the Canadian dollar amounts could have been, or could be,
            converted into United States dollars at the rates on the respective
            dates and or at any other certain rates. Adjustments resulting from
            the translation are included in the cumulative translation
            adjustments in stockholders' equity.


                                                                             F-8
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

      xiii) Net Income Per Weighted Average Common Stock

            Net income per common stock is computed by dividing net income for
            the year by the weighted average number of common stock outstanding
            during the year.

      xiv)  Use of Estimates

            The preparation of financial statements in conformity with generally
            accepted accounting principals in the United States of America
            requires management to make estimates and assumptions that affect
            certain reported amounts of assets and liabilities and disclosures
            of contingent assets and liabilities at the date of the financial
            statements and the reported amounts of revenues and expenses during
            the reporting period. Actual results could differ from those
            estimates.

3.    ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
                                                         1997         1996
                                                          $            $
<S>                                                <C>           <C>
      Accounts receivable                          17,690,675    8,972,747
      Less:  Allowance for doubtful accounts          492,800      100,767
                                                   ----------    ---------

      Accounts receivable, net                     17,197,875    8,871,980
                                                   ==========    =========
</TABLE>

4.    INVENTORY

      Inventory comprised of the following:

<TABLE>
<CAPTION>
                                                   1997               1996
                                                    $                  $
<S>                                          <C>                 <C>
      Raw materials                           2,244,686          1,526,385
      Work-in-process                           590,778            248,792
      Finished goods                         10,017,296          5,004,161
                                             ----------          ---------

                                             12,852,760          6,779,338
                                             ==========          =========
</TABLE>

5.    CASH SURRENDER VALUE OF LIFE INSURANCE

      The cash surrender value of life insurance represents the value of life
      insurance policies of the former directors of Aviv, Inc. Subsequent to
      December 31, 1997, the majority of the policies were redeemed for proceeds
      aggregating $393,285.


                                                                             F-9
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

6.    PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                          1997        1996
                                                           $           $
<S>                                                  <C>         <C>
      Office equipment                                 327,565     165,569
      Machinery and manufacturing equipment          1,025,183     268,561
      Computer equipment and software                  189,653     140,118
      Automobile                                         6,000        --
      Leasehold improvements                           340,906     208,459
      Waxes and moulds                               1,466,264   1,081,129
                                                     ---------   ---------

              Cost                                   3,355,571   1,863,836
                                                     ---------   ---------

      Less: Accumulated amortization
            Office equipment                           130,512     110,960
            Machinery and manufacturing equipment      265,913     169,440
            Computer equipment and software            121,260     111,426
            Automobile                                    --          --
            Leasehold improvements                      68,795      37,794
            Waxes and moulds                           880,943     689,555
                                                     ---------   ---------

                                                     1,467,423   1,119,175
                                                     ---------   ---------

      Net                                            1,888,148     744,661
                                                     =========   =========
</TABLE>

7.    GOODWILL

<TABLE>
<CAPTION>
                                                        1997          1996
                                                         $             $
<S>                                                <C>             <C>
      Cost                                         1,483,848       283,848
      Less:  Accumulated amortization                147,239       105,885
                                                   ---------       -------

      Net                                          1,336,609       177,963
                                                   =========       =======
</TABLE>


                                                                            F-10
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

8.    BANK INDEBTEDNESS

      The bank loan bears interest at the bank's prime lending rate plus 1/2%
      per annum (8.0% at December 31, 1997 and 5.25% at December 31, 1996) with
      interest payable monthly. The weighted average interest rates incurred on
      the bank loan were 5.42% and 6.58% per annum for the years ended December
      31, 1997 and December 31, 1996, respectively. As security, the company has
      provided a general assignment of accounts receivable, a general security
      agreement constituting a first charge over all present and future personal
      property of the company and an assignment of key man life insurance of a
      director in the amount of $704,225 payable to the bank as of December 31,
      1997 and $734,107 as of December 31, 1996. The available line of credit
      under the bank loan amounted to $16,549,000 as at December 31, 1997.

      The company also provided to the bank an assignment of accounts
      receivable, and a general security agreement constituting a first charge
      over all present and future property with UCC filings of security in the
      appropriate jurisdictions of its subsidiary companies, as well as
      hypothecation of all the shares of these subsidiaries. (See note 1).
      Furthermore, an affiliated company (owned wholly by the company's majority
      stockholders) has provided a general security agreement constituting a
      first charge over its present and future property and a corporate
      guarantee secured by a collateral mortgage providing a second fixed charge
      over its property. Furthermore, the company also provided to the bank an
      assignment of all security taken by the company from a related party,
      Diamante Fine Jewellery Limited, over which it has effective control.
      Certain stockholders have provided a postponement of their loans to the
      company in an amount of $1,400,000.

      The facility contains covenants specifying minimum and maximum selected
      financial ratios. The agreement contains restrictions on changes in
      ownership and line of business, on further encumbrances of assets and on
      the guarantees and other contingent liabilities.

9.    ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                    1997              1996
                                                     $                 $
<S>                                            <C>               <C>
      Trade payables                           3,240,877         1,582,701
      Accrued expenses                           650,517           399,722
                                               ---------         ---------

                                               3,891,394         1,982,423
                                               =========         =========
</TABLE>


                                                                            F-11
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

10.   LOANS PAYABLE


<TABLE>
<CAPTION>
                                                                                      1997                1996
                                                                                       $                   $
<S>                                                                              <C>                 <C>
           a)   Loans from stockholders

                Loans are secured by a general assignment of the company's
                assets subject to the prior encumbrances disclosed in note 8,
                $1,400,000 subordinated to the company's banker and
                bear interest at 10% (9% for 1996)                               1,965,148           1,080,838

           b)   Loan is provided by the company's banker, subject to the
                encumbrances disclosed in note 8, bearing interest at the prime
                lending rate of the company's bank plus 1%, repayable in 36
                equal monthly installments plus interest
                with the final payment due in November 2000                      1,369,327                  -

           c)   Loan is provided by the bankers of Aviv, Inc., with no specific
                terms of repayment. This loan was repaid in full in
                February 1998                                                    2,971,631                  -

           d)   Repaid during the year                                                  -            1,195,936
                                                                                 ---------           ---------

                                                                                 6,306,106           2,276,774

                Less:   Current portion                                          3,441,109           1,195,936
                                                                                 ---------           ---------

                                                                                 2,864,997           1,080,838
                                                                                 =========           =========

                Aggregate maturities of loans payable are as follows:
                                                                                     1997                 1996

                                                                                       $                    $

                Repayable during the following periods:
                    Within one year                                              3,441,109           1,195,936
                    Over one year but not exceeding two years                      468,690           1,080,838
                                                                                 ---------           ---------

                                                                                 3,909,799           2,276,774
                                                                                 =========           =========
</TABLE>

      The weighted average interest rates per annum incurred were 9.5% for the
      year ended December 31, 1997 and 12.83% for the year ended December 31,
      1996.


                                                                            F-12
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

11.   CLASS B REDEEMABLE SPECIAL STOCK

<TABLE>
<CAPTION>
                                                       1997               1996
                                                         $                  $
<S>                                               <C>                <C>
           Redeemable Special Stock

           11,111  Class B special stock                 -              81,067
           Less:  Current portion                        -              81,067
                                                  ---------          ---------

                                                         -                  -
                                                  =========          =========
</TABLE>

           These stock were redeemed during 1997.

12.   INCOME TAXES

           a) Significant components of provision for income taxes are:

<TABLE>
<CAPTION>
                                                      1997                1996
                                                        $                   $
<S>                                                <C>                 <C>
                Current                            541,423             301,328

                Deferred                                -              (5,182)
                                                   -------             -------

                                                   541,423             296,146
                                                   =======             =======
</TABLE>

b)    Deferred income taxes represented the tax charges derived primarily from
      temporary differences between amortization of property, plant and
      equipment and amortization of goodwill charged to operations and amounts
      deducted from taxable income. As a consequence of the issuance of common
      stock during the year, issue expenses were incurred which are deductible
      for tax purposes over five years. The deferred income taxes at December
      31, 1996 has been applied to the issue expenses (note 13).


                                                                            F-13
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

13.   CAPITAL STOCK

      a)    D.G. Jewellery of Canada Ltd.

            Authorized

            An unlimited number of common stock

            Issued

<TABLE>
<CAPTION>
                                                                         1997           1996
                                                                           $              $
<S>                                                                 <C>               <C>
                    5,165,000   Common stock (3,900,000 in 1996)    6,587,602             84
                    1,265,000   Warrants                              113,225             -
                                                                    ---------          -----

                                                                    6,700,827             84
                                                                    =========          =====
</TABLE>

      b)    All authorized classes of capital stock, other than common stock,
            were eliminated during 1997.

      c)    During the year, the company issued 1,265,000 common shares and
            1,265,000 warrants as follows:

            Proceeds received from issuance                       $   7,716,500

            Issue expenses (net of income taxes)                      1,015,757
                                                                  -------------

            Net proceeds                                          $   6,700,743
                                                                  =============

            Net proceeds include the non-cash items of deferred costs of public
            issue and deferred income tax recoveries.

      d)    As at December 31, 1997, the company had warrants outstanding to
            purchase 1,265,000 shares of the common stock at $6.25 per share.
            The warrants expire in 2001.

      e)    In December, 1996, the board of directors and stockholders adopted
            the 1996 D.G. Jewellery of Canada Ltd. Stock Option Plan (the "1996
            Plan"), pursuant to which 500,000 shares of Common Stock are
            provided for issuance. The 1996 Plan is administered by the board of
            directors.

            The 1996 Plan is for a period of ten years, expiring on December 15,
            2006. Options may be granted to officers, directors, consultants,
            key employees, advisors and similar parties who provide their skills
            and expertise to the Company. Options granted under the 1996 Plan
            may be exercisable for up to ten years, may require vesting, and
            shall be at an exercise price all as determined by the board.

            The exercise price of an option may not be less than the fair market
            value per share of Common Stock on the date the option is granted in
            order to receive certain tax benefits under the Income Tax Act of
            Canada (the "ITA"). The exercise price of all future options will be
            at least 85% of the fair market value of the Common Stock on the
            date of granting of the options.


                                                                            F-14
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

13.   CAPITAL STOCK (cont'd)

      e)    (cont'd)

            Any unexercised options that expire or that terminate upon an
            employee's ceasing to be employed by the Company become available
            again for issuance under the 1996 Plan.

            The 1996 Plan may be terminated or amended at any time by the board
            of directors, except that the number of shares of Common Stock
            reserved for issuance upon the exercise of options granted under the
            1996 Plan may not be increased without the consent of the
            stockholders of the Company.

            The Board has granted 172,500 Options to date under the 1996 Plan to
            20 persons, including officers, directors and key employees. The
            options are exercisable at $1.38 per share for five years expiring
            February 9, 2002.

            These options were not exercisable until August 20, 1997 at which
            time they were able to be exercised up to 25% of the amount of
            shares issueable under the Options, and an additional 25% each six
            month anniversary date thereafter.

            None of these options have been exercised to date.

      f)    The underwriters for the issuance of the common shares in 1997 hold
            options to acquire 110,000 common shares at $9.90 and 110,000
            warrants at 16.5(cent). This option expires in 2002.

14.   Earnings Per Common Share

      The company has adopted Statement No. 128, Earnings Per Share, which
      requires presentation, in the consolidated statement of income, of both
      basic and diluted earnings per share.

<TABLE>
<CAPTION>
                                                                                           1997           1996
                                                                                             $              $
<S>                                                                                   <C>            <C>
           Average common stock outstanding                                           4,743,333      3,900,000
           Average common shares issuable                                                62,137             -
                                                                                      ---------      ---------

           Average common stock outstanding assuming dilution                         4,805,470      3,900,000
                                                                                      =========      =========
</TABLE>

           The outstanding warrants and underwriters' options were not included
           in the computation of earnings per common share assuming dilution
           because the exercise prices were greater than the average market
           price of the common shares.


                                                                            F-15
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

15.   RELATED PARTY TRANSACTIONS

<TABLE>
<CAPTION>
                                                              1997         1996
                                                                $            $
<S>                                                        <C>          <C>
           Rent paid to a company owned by stockholders    100,605       92,067
           Interest paid to stockholders                   217,724      293,578
</TABLE>

           (See additional related party transactions disclosure in notes 10 and
17).

16.   COMMITMENTS

      The company has operating leases for leasehold improvements and premises
      which extend through January 31, 2005. Rental and leasing expenses for the
      year ended December 31, 1997 under these leases were $169,500.

      Future minimum rental payments as of December 31, 1997 under agreements
      classified as operating leases with non-cancellable terms in excess of one
      year, are as follows:

<TABLE>
<CAPTION>
      Payable during the following periods:
<S>                                                                <C>
           Within one year                                         $     209,361
           Over one year but not exceeding two years                     215,185
           Over two years but not exceeding three years                  183,971
           Over three years but not exceeding four years                 125,158
           Over four years but not exceeding five years                  133,548
           Thereafter                                                    452,721
                                                                   -------------

                                                                   $   1,319,944
                                                                   =============
</TABLE>

17.   CONTINGENCIES

      The company is contingently liable under contested lawsuits amounting to
      approximately $1,760,000. In the opinion of management there is no merit
      for these claims and the company has filed counter claims. No provision
      has been recorded in the accounts for possible losses or gains. Should any
      expenditures be incurred by the company for the resolution of these
      lawsuits, they will be charged to the operations of the year in which such
      expenditures are incurred.

      The company is contingently liable to a mortgage corporation for the
      guarantee of a mortgage in the amount of approximately $575,000 given to a
      party related to the major stockholders of the company.


                                                                            F-16
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

18.   SEGMENTED INFORMATION

           a)   Sales to Major Customers

<TABLE>
<CAPTION>
                                                                         1997           1996
<S>                                                             <C>            <C>
                Sales to major customers                        $  18,042,967  $   2,659,931
                Percentage of total sales                                 82%            19%

                Accounts receivable due from major customers    $  14,446,215  $   2,038,420
                Percentage of total accounts receivable                   84%            28%
</TABLE>

                Ongoing credit evaluations of each customer's financial
                condition are performed and, generally, no collateral is
                required. The company maintains reserves for potential credit
                losses and such losses, in the aggregate, have not exceeded
                management's expectations.

           b)   Sales by Geographic Area

<TABLE>
<CAPTION>
                                                             1997           1996
                                                               $              $
<S>                                                    <C>            <C>
                Canada                                  7,848,152     10,991,826
                United States of America               13,909,306      3,093,148
                Other                                     325,478             -
                                                       ----------     ----------

                                                       22,082,936     14,084,974
                                                       ==========     ==========
</TABLE>

           c)   Net Income by Geographic Area

                The company's accounting records do not readily provide
                information on net income by geographic area. Management is of
                the opinion that the proportion of net income based principally
                on sales, presented below, would fairly present the results of
                operations by geographic area.

<TABLE>
<CAPTION>
                                                            1997           1996
                                                              $              $
<S>                                                    <C>              <C>
                Canada                                   371,458        356,660
                United States of America                 658,371        100,368
                Other                                     15,405             -
                                                       ---------        -------

                                                       1,045,234        457,028
                                                       =========        =======
</TABLE>


                                                                            F-17
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

18.   SEGMENTED INFORMATION (cont'd)

           d)   Identifiable Assets by Geographic Area

<TABLE>
<CAPTION>
                                                        1997           1996
                                                          $              $
<S>                                                <C>            <C>
                Canada                             2,200,171      1,863,836
                United States of America           1,155,400             -
                                                   ---------      ---------

                                                   3,355,571      1,863,836
                                                   =========      =========
</TABLE>

           e)   Purchases From Major Suppliers

<TABLE>
<CAPTION>
                                                                     1997           1996
<S>                                                         <C>            <C>
                Purchases from major suppliers              $   6,928,865  $   4,985,269
                Percentage of total purchases                         48%            45%

                Accounts payable due to major suppliers     $   1,815,001  $     663,705
                Percentage of total suppliers                         70%            26%
</TABLE>


                                                                            F-18
<PAGE>

D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)

19.   OTHER SUPPLEMENTAL INFORMATION

           The following items were included in the statements of income:

<TABLE>
<CAPTION>
                                                                                           1997           1996
                                                                                             $              $
<S>                                                                                     <C>            <C>
           Amortization of property, plant and equipment                                348,248        184,838
           Amortization of goodwill                                                      41,355         12,216
                                                                                        -------        -------

                                                                                        389,603        197,054
                                                                                        =======        =======

           Operating lease rentals for
                -  rented premises                                                      187,075        141,104
                -  leasehold improvements                                                68,893         75,363
                                                                                        -------        -------

                                                                                        255,968        216,467
                                                                                        =======        =======

           Interest expense on
                -  bank indebtedness                                                    604,490        529,856
                -  loans payable                                                        217,725        293,578
                -  other                                                                     -           4,430
                                                                                        -------        -------

                                                                                        822,215        827,864
                                                                                        =======        =======
</TABLE>

20.   INVESTMENT TAX CREDITS

      As of December 31, 1997 and December 31, 1996 the company has made claims
      to Revenue Canada for research and research development expenditures
      totalling $150,000. The related investment tax credits refundable as
      December 31, 1997, which is approximately 35 cents per dollar of
      expenditure, have not been recognized for accounting purposes, and will be
      accounted for as reduction of the related current or capital expenditure
      when they are approved by Revenue Canada.

21.   COMPARATIVE FIGURES

      Certain figures in the December 31, 1996 consolidated financial statements
      have been reclassified to conform with the basis of presentation used in
      1997.


                                                                            F-19